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Is the Shipping Industry Ready for a Dynamic Comeback? No, It’s Not! – Navios Maritime Partners L.P. (NMM), Diana Shipping Inc. (DSX)

Over the past couple of years, the shipping industry has been engulfed in an endless spiral of macroeconomic headwinds and slashed daily rates. Last year, the Baltic Dry Index, the barometer that gauges the cost of shipping dry bulk commodities around the globe, hit rock-bottom levels smashing every glimmer of hope for an industry recovery.

However, Greek ship owners, who more or less hold the reins of the shipping industry, primed the pump by acquiring new dry bulk carriers. Recently, Greek-based ship broker Golden Destiny pointed out that, during the most recent quarter, Greek shippers bought twice as many Capesize vessels as they did in all of last year.

Given the disturbing overcapacity that has been giving the industry a splitting headache for quite some time now, I can’t help but wonder: Are these Greeks crazy?

What’s going on?

Ship yards all over the world, and more specifically in China, must be feeling pretty excited with how strongly 2013 has started off. During the first three months of 2013, 471 new orders were placed marking a 43% year-over-year lift in ship owners’ demand for advanced and eco-friendly vessels. Golden Destiny says that, for the period, Greek shippers ordered 41 vessels, of which 12 were dry bulk carriers. In particular, new orders for the mammoth Capesize vessels almost doubled to 3.8 million dead weight tonnage (dwt).

So, why this sudden itch for new dry bulk vessels? Perhaps, ship owners have a hunch that the dry bulk market might be coming back from the dead. After all, since the start of the year, freight rates have shown an eye-catching upturn. According to the latest data from shipbroker RS Platou, average spot rates for Panamax ships increased from $5,500 per day at the start of 2013 to around $9,000 at the end of last month. Over the same period, average daily earnings on the spot market for Handysize and Supramax vessels jumped from $6,000 and $7,000, respectively, to $8,000 and $9,500. Average spot rates in the Capesize sector went downhill during March, but bounced back nicely to $6,300 at the end of April.

Navios Maritime Partners L.P.Navios Maritime Partners L.P. (NYSE:NMM) took notice of the recent devaluation of the Japanese Yen and did not waste any time. It leaped at the opportunity to strike a sweet deal with Japanese shipyards. In just a few months, Navios Maritime Partners L.P. (NYSE:NMM) bought four dry bulk ships — two brand new and two relatively young second-hand vessels —  for a total of $108 million, of which 50% will be financed by bank debt. The ships are scheduled for delivery in the fourth quarter of this year. Angeliki Frangou commented on the recent acquisitions: “The flexibility in delivery dates should allow us to employ the vessels at what we expect to be more favorable rates than the current market.”

Navios Maritime Partners L.P. (NYSE:NMM) ended the quarter with considerable strength in quarterly revenue and operating surplus – the number one indicator for the sustainability of its double-digit dividend yield. The stock is trading at around $15, up by 22% year-to-date, and, recently got the thumbs up from The Street, as well as from analysts at RBC Capital, who raised their target price from $16.00 to $17.00.

Diana Shipping Inc. (NYSE:DSX) – the owner of 33 dry bulk vessels – gets four (out of five) stars from The Motley Fool CAPS Community. The stock has rallied as much as 35% since January urging Bloomberg’s analysts to make a bullish call.

Over the past couple of years, its comparably clean balance sheet enabled Diana Shipping Inc. (NYSE:DSX) to open its pockets and multiply its fleet’s capacity. It focused mainly on acquiring second-hand vessels and entering right away into short to medium-term time charters. But, so far, this strategy has taken a toll on its revenue given the depressed charter rates. The majority of its contracts will expire next year, and if rates have not improved substantially by then, things might get pretty ugly for this shipper.

Even the “black sheep” of the shipping industry, DryShips Inc. (NASDAQ:DRYS), soared on whispers of potential market comeback. The stock is up 15% year-to-date, but, still, it hasn’t escaped the doldrums. DryShips Inc. (NASDAQ:DRYS) is on the ropes with mountainous liabilities. Yet, George Economou, the company’s CEO, is Chinese shipyards’ most lovable Greek customer.

At the moment, DryShips Inc. (NASDAQ:DRYS) has 10 dry bulk vessels on order, but it can’t afford their construction. So far, in order to cover the CAPEX associated with its newbuilding program, it has been sucking the life out of its subsidiary, Ocean Rig UDW Inc (NASDAQ:ORIG). Looking ahead, the company needs to raise $300 million through 2014, and I bet my bottom dollar it will have to get rid of more of its unfinished ships.

What’s really going on

Since 2010, scrapping activity has witnessed sky high growth rates fueling expectations for an improvement in the imbalance between global demand and tonnage supply. However, over the same period, shippers continued to spend money like water deploying their fleet. Despite the tight financing conditions, and the overall grim market environment, new buildings’ all-time low prices were too tempting to ignore:

Source: BRS Annual Review 2013

However, this recent flood of fresh orders could indicate that the competitively priced opportunities within the newbuilding market are drying up. So, ship owners are just trying to make hay while the sun still shines.

Recently, Ren Yuanlin, executive chairman of China-based Yangzijiang Shipbuilding, mentioned: “the bottom of newbuilding prices has been reached, and prices have firmed by 3-5% since the last quarter of 2012.” As of April 2013, the price for a new Capesize built by Chinese shipyards stood at $47-48 million, 3% higher from a 10-year low, and more than 50% below the 2008 peak. Shipbroker Clarkson Hellas says that shipyards in the Far East have already secured enough contracts to keep production going for at least another two years. Thus, major dry bulk carriers’ builders in China and South Korea have plenty of time to bargain on favorable pricing for 2016 deliveries, which, for now, remain held under the microscope.

It is true that shipyards around the world are feeling the squeeze of slashed shipping asset prices. If they truly intend to put their finances in the black, they have to stop accepting below break-even point orders. More importantly, Intermodal’s analyst George Dermatis noted in a recent report that inflationary pressures in China could push ship prices higher. Over the past decade, minimum wage went through the roof. On top of that, lately, Renminbi’s real exchange rate has been following a steady uptrend triggering a pick up in labor costs, and, consequently, in production costs. But, still, unless freight rates start to show signs of sustainable improvement, shipyards will continue clutching at straws.

Keep your fingers crossed for the struggling shippers

Greeks’ recent buying spree was partly backed by hopes that, upon delivery of their newbuildings, the gap between demand and supply will have been narrowed. Currently, newbuilding orders around the world account for about 20% of the existing dry bulk fleet with deliveries expected within the next three years.

Going forward, even though, there are market indicators, which suggest that the demand part of the equation might “save the day,” still, today’s freight rates look meager compared to the “golden days” of the shipping industry. Shippers hunger for new and advanced vessels, although, it does make sense in some cases, it is causing the market to move at a snail’s pace.

The article Is the Shipping Industry Ready for a Dynamic Comeback? No, It’s Not! originally appeared on Fool.com and is written by Fani Kelesidou.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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