The last few weeks have been, shall we say "interesting" for maritime shipping stocks like FreeSeas Inc. (NASDAQ:FREE), DryShips Inc. (NASDAQ:DRYS), and NewLead Holdings Ltd (NASDAQ:NEWL). The strong rise in the Baltic Dry Index - the average daily charter rate of a dry goods vessel - since mid-August (and really since early June) has meant maritime shippers can charge more for their services, and who knows? Maybe they can even turn a profit sometime in the foreseeable future. As a result of that possibility, DRYS gained nearly 100% in a little over a month., NEWL was up as much as 70% at one point in late September, and FREE advanced nearly 300% on the heels of the Baltic Dry Index's runup from 1000 to more than 2000 in just a little over a month.
In all fairness, shares of NewLead Holdings Ltd, FreeSeas, and DryShips have all since peeled back a little, as they all three became overextended, and some had their doubts about the legitimacy and longevity of the Baltic Dry Index's rally. A funny thing happened on the way to the Baltic Dry Index's funeral, however... nothing. The BDI has held up around 2000 since mid-September, suggesting this new charter price - and maybe even the rising price trend - is for real. If that's the case (and it seems to be - read on), then this dip from NEWL, DRYS, and FREE are buying opportunities.
First and foremost, price is the final arbiter for any stock or index. It represents the amount of cash someone is willing to buy to buy something. Period. The merits and logic can be debated all day, but "the price" is never wrong. That idea matters in this case, if only to say there has to be a reason the Baltic Dry Index has been climbing, and held onto new levels for more than a couple of days.
Thing is, it's not just rising dry bulk shipping prices that's implying there's a rebound underway for the bulk-shipping industry. There are other clues pointing to the same (and all of them for the first time in a long time). In no particular order:
The price of used (5 year old) Capesize and Panamax vessels are on the rise. They have been for months, but they really started to head up in August. Ditto for new vessel prices. The cost of an average Capesize has grown from $45 million at the end of last year to $48 million now. Capacity growth is at multi-year lows, and still falling. It may seem a little counter-intuitive - for shippers to become more profitable, shipping capacity should fall in order to dial down supply to meet what's relatively weak demand. And truth be told, that would help enormously. That's not going to happen though. The next-best plausible alternative is very, very slow shipping capacity growth. The most recent growth rate says Capesize capacity growth is now at 5%, while Panamax capacity growth is now at 10%. We're almost to the point where new supply and demand growth are at a sustainable (and profitable) balance. Construction activity is still falling too. Scrappage rates are falling, and orders are rising. In mid-2012, the industry was scrapping an average of more than 15 ships per week. That pace is now right around 6 scrapped vessels per week, and still falling. Meanwhile, vessel orders are rising (even though in-construction counts are falling... admittedly a tad conflicting).The bottom line is, while the Baltic Dry Index has been bumped around in the past, this is the first time the BDI has risen this much at the same time other key indications have suggested the supply/demand imbalance seen in 2008 is finally getting back to a sustainable normal. Use the lull from shares of FreeSeas Inc., DryShips Inc., and NewLead Holdings Ltd as a buying opportunity - this is the real deal.
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