My favorite in this sector is DryShips(DRYS). I have been holding this since 60 as posted earlier. Today DRYS closed above 90. That is a good 50% return during a very bad market.
Investor's Business Daily
Smiling Dry-Bulk Shippers See The Boom Times Lasting For Years
Friday September 28, 7:00 pm ET
Marilyn Alva
They haul iron ore, coal, grains and other bulk commodities.
Thanks to a convergence of factors -- including the growing needs of China and other developing nations -- they're also raking in more cash than ever. Charter rates are at record highs.
"We've already surpassed profits from last year," said Eleftherios Papatrifon, chief financial officer of Excel Maritime Carriers (NYSE:EXM - News).
Along with other dry-bulk shipping executives at an industry conference put on by Jefferies & Co. in New York on Wednesday, he predicted 2008 would be another banner year.
Others said the dry-bulk boom could last even longer.
Upbeat Comments
The upbeat comments came from some of the bigger dry-bulk companies, such as DryShips (NasdaqGS:DRYS - News) and Eagle Bulk Shipping (NasdaqGS:EGLE - News), and smaller outfits, including startup OceanFreight (NasdaqGM:OCNF - News).
They had their reasons, and not all of them pointed solely to China.
"We think the market is undervaluing India," said Sophocles Zoullas, Eagle's chief executive.
Citing a massive urban infrastructure project just getting underway in 62 second-tier cities in India, he said the need for steel and concrete will explode over the next several years.
Iron ore is needed to make steel, and prices are already at record highs. Shipping titans say industry buzz has iron ore rates going up 20% to 25% next year.
Demand for iron ore certainly isn't slowing elsewhere, either.
China continues to suck in much of the available supply from key source countries such as Brazil and Australia, leaving many other customers scrambling for what's left.
The supply crunch often means customers must tap into more distant sources, meaning longer ocean voyages -- and more revenue -- for shipping firms.
China also became a net importer of coal for the first time this year. In itself, that's good news for dry-bulk business. Also, like iron ore, coal customers besides guzzler China are pressed to bring in supplies from longer distances than usual.
"Charter rates are setting all-time highs on a daily basis," said Douglas Mavrinac, managing director and lead maritime analyst at Jefferies.
The average spot rate for large capesize ships averaged $150,000 a day last week, while smaller panamax boats fetched an average $75,000 per day on the spot market, according to Jefferies.
While its outlook on the crude oil and product tanker market is cautious over the next two years, Jefferies' view of the dry-bulk shipping market over that time is favorable.
In addition to strong demand for iron ore, significant new supply is coming out of Australia and Brazil to meet it, Mavrinac says.
"So there's more to ship," he said. "So much so, it's outstripping the number of new ships being delivered from shipyards."
Port congestion is adding to the vessel supply crunch. The long waits to unload in ports has reduced dry-bulk vessel capacity by more than 11%, said Diana Shipping (NYSE:DSX - News) President Anastassis Margaronis.
In India alone, he said, port capacity must increase by 130%. That's not likely to happen anytime soon.
Said OceanFreight CEO Robert Cowen: "The whole logistics chain is being pulled tight."
To keep up with demand, dry-bulk operators are stepping up ship orders.
In July, Eagle Bulk announced it would spend $1.1 billion to buy 26 new supramax vessels -- the smallest type of dry-bulk ship, for delivery starting next year through 2012. The firm acquired 39 other ships in the last two years for $1.5 billion.
TBS International (NasdaqGM:TBSI - News) expects delivery of four new ships later this year through the end of 2008. It has contracted for six new ships to be built in China for its core Asian and South American markets, at about $35.4 million each, with delivery expected in 2009 and 2010.
"These ships are sorely needed, especially as globalization goes forward," TBS' CEO Joseph Royce said.
Golden Ocean Group, listed on Norway's stock exchange, has ordered 23 vessels for delivery between 2008 and 2010.
Overcapacity
Since overcapacity is an ongoing concern in the dry-bulk business, the higher number of deliveries slated for 2009 and 2010 caused some to question the potential for rate drops.
But shippers waved away the concerns.
"Demand is overwhelming and will be from 2010 and beyond. You haven't seen the full strength of India," said Quintana Maritime (NasdaqGS:QMAR - News) Chief Executive Stamatis Molaris.
Not all of the boom in business comes from iron ore and coal. TBS transports all kinds of dry cargo, from fertilizer to finished steel. TBS's Royce said renewals from customers are "at higher (rate) levels than anytime in the past."
Jeffries' Mavrinac says rates will keep climbing through 2007, and that 2008 rates should be higher than in 2007.
Since they are more volatile, spot rates are typically higher than fixed rates. For now, firms that have more spot-rate exposure, such as DryShips, can "maximize their returns," Mavrinac said.
DryShips' Chief Executive George Economou said 98% of the firm's fleet next year will be left unfixed "to take advantage of the strong environment."
Genco Shipping (NYSE:GNK - News) is in the middle. It uses a balanced approach of both spot and fixed contracts.
Quintana's Molaris said his company has been criticized for its emphasis on fixed-time charters "in this boom market."
But he said, "We run the company to minimize market risk. We have significant upside potential for the risk we take."
Eagle Bulk also has a higher degree of fixed charters than spot-rate deals. But since renewals are likely to be priced at higher levels, as Mavrinac says, the company isn't shifting gears.
"This is the first time I've seen in my career charterers coming to us and asking for packages," Eagle Bulk's Zoullas said. "Charterers are saying, 'Give us more years.'"
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