"Rock bottom" is one of the gloomy cliches recently associated with the shipping industry. The industry's profitable boom from 2006-2008 was followed by 2009's dramatic fall in shipping rates and billions of dollars in company losses.
Shipping line operators bled money due to decreased trade, shipyards were flooded with order cancellations, banks tightened up lending regulations, and shipping companies' stocks plummeted.
But with the global economy on the mend, shipping industry stocks could be some of the biggest movers in 2010.
There is an undeniable need for a robust shipping industry wherever there is economic activity. And while economies around the world return to prosperity, thus reviving the shipping industry, investors may not have another opportunity to buy shares at such bargain prices.
So where should investors look for these opportunities?
A good place to start would be China.
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China's aggressive $586 billion stimulus plan breathed new life into the shipping industry. China's economy grew by 10.7% year-over-year in the fourth quarter and by 8.7% for the full year, fueling trade activity throughout Asia.
Beijing's recent moves to tighten monetary policy and curb lending to keep the economy from overheating have raised doubts about whether or not this growth is sustainable. But here are three signs that China is ready to bring global shipping back from the brink:
The Baltic Dry Index (BDI) has been a leading economic indicator since it was introduced in 1985. It measures the demand for shipping capacity against the supply, and represents the daily average of prices to ship raw materials.
In May 2008, the BDI hit a record high of 11,793, but seven months later it had dropped by 92% -- a preliminary sign that 2009 was not going to be a year of trading, manufacturing and profiting.
Now, the BDI has climbed back to over 3,000, meaning customers are paying more than they were a year ago to ship materials across the globe. Transpacific shipping lines, mostly consisting of container ships servicing trade to and from Asia, are already reporting vessel use in the mid-to-high-90% range and expect a significant increase in volumes for 2010.
So let's take a more narrow focus on global shipping prices, one that accounts specifically for container ships: The China Containerized Freight Index (CCFI).
The CCFI measures shipping prices on routes from China to all over the globe, including Australia, Europe, Japan, and the Western U.S. Currently the CCFI has been trending upward since mid-2009. As China's economy paves the way for shipping industry profits, look for the CCFI to keep heading north.
As demand rebounds from hitting painful lows, the long-term winners in the shipping game will be those who aren't debt-ridden by oversupply.
Shipping is cyclical and usually operates in three-year highs and lows as shipping rates rise alongside commodities prices. Currently, the optimism that was sown in the prosperous period from 2006-2008 has come back to haunt shipping companies - in the form of new build deliveries and payments coming due to shipyards. Now, the bears believe overcapacity will gut shipping profits in 2010.
But companies who kept orders to a minimum during the growth period will be able to avoid lost money on cancelled orders, and those that are in the market to buy can take advantage of quick, cheap vessel sales.
One company staying afloat is Diana Shipping (NYSE: DSX). The Greece-based dry-bulk company is regarded as conservative - some even say dull - which may save it from meeting the fate of its more frivolous rivals. Diana's balance sheet boasts a 25% debt-to-capital ratio, beating out some overleveraged competitors.
As most companies are trying to get out of ship orders, Diana has been buying vessels in accordance with its fleet-expansion project. Diana wisely balanced itself to prepare for volatility in shipping rates by securing about two-thirds of its fleet in long-term charters for 2010, leaving the rest able to take advantage of rate increases.
Although Diana isn't exactly a risky bet, investors who want to take an even more cautious approach to the shipping sector should go with Claymore/Delta Global Shipping exchanged-traded fund (NYSE: SEA), whose performance corresponds to the Delta Global Shipping Index.
This index consists of 30 shipping companies, including both dry-bulk and container. The fund is up close to 10% year-to-date and more than 83% from last year's lows.
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