Shipments of commodities and raw materials such as grains, iron ore, coal etc. are excellent leading indicators of the future global economic growth.
After all, no one books a cargo ship unless there is a firm order at the other end.
So it is of great interest to note that the index that tracks the dry bulk cargo demand and rates has turned up after posting a low in August. The Baltic Dry Index is up 73% since August 8, 2011.
Global Economic Conditions Left The Dry Bulk Shipping Stocks Scrapping The Bottom
Consider Excel Maritime Carriers (EXM) stock that peaked out at $77/share in Oct 2007 and is now trading at $3 and change per share. Or Genco Shipping (GNK) that has posted a decline of 88% from $75/share in May 2008 to $8.76/share recently.
These stocks have been decimated by the worldwide economic malaise that reduced demand for the commodities as well as the glut of new ships coming on the market.
With the new ship construction taking as much as two years, shippers who ordered new builds to increase their capacity during the peak demand years have been receiving the delivery of their ships in the last year or so.
Since the demand is no longer there, this has resulted in over capacity of ships resulting in declining charter rates.
Economic Activity Picking Up
The recent increase in the BDI shows that the economic activity around the world is showing signs of picking up. Time will tell if this uptick is sustained. It should be noted however that increase in shipping not only indicates improving demand, but it also indicates that letters of credit are getting easier to come by.
If this trend continues, the profits in the dry bulk sector will improve handsomely as any demand improvement (or reduction) has a magnified impact on the shipping rates, given that capacity cannot be added or reduced quickly in the short term.
Shipping Glut Still Remains
Industry reports suggest that the dry bulk fleet will grow 13% this year while the demand for commodities will only rise 5% – 8%. New merchant ships on order are approximately 30-45% of the existing capacity. This suggests that the overcapacity in this industry will continue to be a problem.
Quite a few of the shippers have resorted to scrapping their vessels as soon as they are delivered to cut their losses, keeping the ship breaking yards in Asia quite busy. However, most estimates suggest that the shipping glut will be worked through by 2013.
As the economic activity picks up, it will reduce some of the oversupply of ships as more idle ships are put in use. Still, with the valuations of some of these shipping companies so low in the market, it is worthwhile to consider these stocks for a purchase if the investor is able to patiently wait a few years for his rewards. Genco Shipping, for example, trades at otherworldly 0.26 Price/Book.
Book values on these companies’s balance sheet are not reflective of the current market value of their shipping assets. However, unless the shipping company is under duress or otherwise has weak capital structure, it is just a matter of time before the market value catches up to the value of the assets. It pays to look long term when analysing shipping stocks at the bottom of their cycles.
BDI Chart Source: http://www.stockcharts.com
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