The shipping industry is the backbone of the global trade–almost 90% of international trade is done through the industry. However, over the last few years the industry has suffered heavily due to the slowdown in the global economy and oversupply of vessels.
Most of the shipping giants experienced more than a 70% decline in their share price. However, a fall in price does not always generate an opportunity to invest, as sometimes the fall is permanent. Nonetheless, there remain some candidates that can prove to be attractive investment opportunities. In my opinion, DryShips Inc. (NASDAQ:DRYS), Diana Shipping Inc. (NYSE:DSX) and Navios Maritime Holdings Inc. (NYSE:NM) have the best chance to make a recovery.
The shipping industry is one of the most volatile and vulnerable industries easily swayed by the currents of demand and supply. The economic slowdown in all of the developed economies meant a sharp decline in the demand for metals, one of the primary materials handled by the shipping companies. A drastic decline in the transportation of drybulk accompanied by a vast pool of suppliers resulted in low-level freight rates.
The drybulk carriers suffered heavily due to the decrease in demand for coal and metals from China. As the Chinese economy experienced a slowdown, the demand for drybulk carrier services declined. As a result, time charter rates have come down drastically. The Chinese economy is still not running at pace and it will take sometime for the demand to pick. As a result, time charter rates will remain close to the current rates for about a year, in my opinion.
How these companies will perform
As I mentioned above, time-charter rates are expected to remain low over the next 12 months and management at DryShips Inc. (NASDAQ:DRYS)seems to agree with my opinion. DryShips Inc. (NASDAQ:DRYS)’ management expects the time-charter rates to remain low during 2013; as a result, there will not be much improvement for the company.
However, what distinguishes DryShips Inc. (NASDAQ:DRYS) from its counterparts is its positive cash flow from its drilling unit under the name of Ocean Rig UDW Inc (NASDAQ:ORIG). Ocean Rig recently reported a first-quarter profit and is in its expansive stage. It should also be kept in mind that impressive performance of Ocean Rig is currently overshadowed by the poor performance of the drybulk segment. When charter rates start to rise, the overall performance of the company will be much better.
Diana focuses on contracts
Diana Shipping Inc. (NYSE:DSX) has taken a slightly different approach. While DryShips Inc. (NASDAQ:DRYS) believes in divestitures, Diana has been more concerned with its shipping contracts. It recently issued charter contracts with Cargill and Clearlake. However, Diana relies on drybulk, which will result in a slow recovery for the company. Nonetheless, the company is getting ready to benefit from increased economic activity over the next 12 months.