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Why Shipping Stocks Are On Fire

The global shipping industry has officially hit a crisis point — loaded ships are queued outside ports around the world, and companies are clamoring for workers who may not get off a ship for a year or more. At the same time, the global economy is picking up steam as demand for goods increases. Supply and demand are out of whack, and day rates for ships are soaring as a result, which should be a windfall for ship owners and logistics companies.

On the dry bulk side of the shipping industry, Star Bulk Carriers (NASDAQ:SBLK), Danaos (NYSE:DAC), Navios Maritime Partners (NYSE:NMM), Diana Shipping (NYSE:DSX), and ZIM Integrated Shipping Services (NYSE:ZIM) could see profitability surge as shipping rates rise. What we don’t know is how long the good times will last for these transport stocks. Here’s what we know today about the dry bulk industry.

Dry bulk shipping is in high demand
Dry bulk shipping — or cargo vessels that are built for dry goods and not liquids — rates have exploded this year to levels we haven’t seen since before the Great Recession. According to Trading Economics, the Baltic Dry Index — a shipping market bellwether — is now at 5,167, up 30% over the past month and 157% over the past year.

For some perspective on that period of time, the index is higher than at any time since September 2008, a peak that ended when the Great Recession hit and global demand for goods around the world dropped. But the recession wasn’t expected, and shipping companies had ordered new ships based on high rates, so ship supply kept hitting the market well after the recession hit. That’s not happening today, according to Klaveness Research — at least not yet. There’s only expected to be about a 2% increase in the global dry bulk fleet over each of the next two years. That may mean that the high rates we see today will stay or even move higher if the economy picks up.

Newbuild orders may pick up now that day rates are on the rise, but it’ll take many years for new ships to reach circulation. In the meantime, ship owners should see a windfall in revenue.

Financial results are starting to follow
Each company has a slightly different strategy, which often includes some long-term charters for ships, so there can be a lag between the Baltic Dry Index rising and profits going up. But we are starting to see the financial impact of higher rates on the industry.

ZIM is seeing the impact earliest because it has an asset-light strategy, leasing ships and then renting out space at the prevailing market rate. Its profitability has surged over the past year.
The windfall should continue for a while. I mentioned above that new supply will be slow to come to the market, and right now demand is through the roof. But the market will likely turn eventually.

How the market turns
Supply and demand always seem to come back into balance in the shipping industry. And it’s what management does with its windfall cash that will determine what stocks do.

If companies spend cash quickly to contract newbuilt ships that won’t be delivered for years or spend it on acquisitions, the money could be lost when the market turns lower. For the foreseeable future, cash generation should be strong in the dry bulk industry, and that should help stocks with exposure to the market. Just beware that the market can turn on a dime when supply exceeds demand, which history says will come eventually.
Source: The Motley Fool

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