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One shipping company's stock is up 588% percent year-to-date. Another is up 149%. A special report developed jointly by Eoin Gleeson at our U.K. affiliate, MoneyWeek Magazine, and Money Morning Associate Editor Mike Caggeso, explains why the maritime shipping industry is about to get bigger and deliver more profits to investors.
Shipping stocks have soared globally. Even in Japan, where most of the market has barely budged for months, the Maritime Transport Index is up 58%. The boom is being fueled by the same dynamics as everything else these days – the huge growth in Asia.
It costs so much to get goods from one side of the world to another in this environment that "in some cases, the cost of the shipping can exceed the value of the cargo," Jonathan Allum, of KBC Group NV, the Belgium-based banking-and-insurance group, wrote in his weekly newsletter, The Blah!
For example, as noted in The Wall Street Journal, imagine you want to get a ton of iron ore from Brazil to Asia. The ore will cost you $60, the shipping $88. Overall, the average price of renting a ship to carry raw materials from Brazil to China has nearly tripled – rising from $65,000 a year ago to $180,000 a day today, the Journal reported.
Ship Shortages and Small Ports
There's a single explanation for this huge price run-up, and it's very simple: There just aren't enough of the right kind of ships. There are plenty of oil tankers around, for instance. The size of the fleet expanded 3.8% this year and the global tanker fleet is forecast to increase by 32% over the next five years, Bloomberg News reported. When shipping titans Teekay Corp. (TK), Frontline Ltd. (FRO) and Overseas Shipholding Group Inc. ( ) found they had turned over $2.2 billion between them in 2004, they used the proceeds to order 522 new tankers.
This frenetic building spree could well lead to a glut in that shipping sector, Bloomberg reported.
There are also plenty of container ships available to ship such consumer goodies as TV sets and refrigerators to the developing world, but dry-bulk shippers haven't been as quick to get their orders in as the others – and the current shortage is the result.
Dry bulk shipping is the marine transportation of significant commodities in bulk, such as gold, or metal ores.
An armada of ships have been ordered – the order book for dry bulk ships is already equal to 45% of the current fleet – but given the typical 36-month lag between order placement and actual ship delivery, the bulk of the dry-bulk navy won't be out of dry dock and seaworthy before 2010.
But even if the ships were ready to move full steam ahead immediately, shipping rates aren't likely to decline very much anyway. The reason: Most of the ports in the busiest countries are just not big enough to handle the recent spurt in shipping traffic caused by the global boom.
In Brazilian ports, ships must typically sit offshore for as long as two weeks before they can unload. And, as of last week, there were 131 coal and iron-ore vessels lining up to get into one of Australia's main ports.
Charter rates are also being boosted by the longer voyages that dry-bulk shippers are undertaking, the Journal reports. With China consuming resources from Australia at an incredible rate, and Japan attempting to follow suit, much of the demand from the remainder of Asia must be satisfied by distant South American mines.
It is entirely plausible that some surplus oil tankers will soon find themselves shipping dry goods around the world, but even with the hope that this might relieve the pressure, we can still expect to see shipping rates escalate all the way through 2008, Jeffries maritime analyst Douglas Mavrinac tells Investor's Business Daily.
Simply put, demand is overwhelming supply. And with India embarking on a massive urban infrastructure project in 62 second-tier cities, China is no longer performing a solo when it comes to crying out for dry-bulk companies to ship badly needed steel, concrete and other construction-related wares.
Delivering Bulk Profits
Dry-bulk-shipping titan DryShips Inc. (DRYS) appears particularly well positioned to benefit from the record charter rates the industry is right now enjoying. Because DryShips hasn't locked itself into long-term contracts at the low rates that dominated prior to the current shipping shortage, it has excellent exposure to the escalating spot rate for dry-bulk charters. Mavrinac, the Jeffries maritime analyst, estimates that 98% of the firm's fleet will be available on unfixed price contracts next year – meaning if the high rates remain, the DryShips will reap the financial benefits.
DryShips operates 33 vessels, and specializes in shipping iron ore, coal and grains. The fleet is composed chiefly of Panamax ships, the largest of dry-bulk vessels, which have seen their daily charter rate soar from $10,000 to an extraordinary $85,000 over the last decade. Since Jan. 1, its stock has skyrocketed 588%. And still, the company trades on a very reasonable forward Price/Earnings Ratio of 9.5.
A company that is taking the opposite approach by locking itself into fixed contracts to ensure steady growth is Greek shipper Quintana Maritime Ltd. (NASDAQ:QMAR). The $1.1 billion outfit has a fleet of 29 vessels, including 11 Panamax ships, which puts it in a pretty strong position at the top end of the dry bulk food chain in what is a highly fragmented market. Although the shares are up 149% already this year, but are still trading at only 11.8 times projected earnings.
And there's a bonus: The stock offers a 4.6% dividend yield.
Associate Editor Mike Caggeso contributed to this report.
News and Related Story Links:
- Bloomberg News:
Frontline, Teekay Crash Nears Amid Tanker Glut, Crude.
- Money Morning Investment Analysis:
Three Ways to Profit From Australia's Strong Dollar and Massive Natural Resource Reserves.
- Money Morning Investment Analysis:
China and Japan Digging Up A Skirmish 'Down Under.'
- Wikipedia: Panamax ships.