What are we to make of the shipping sector? asks Jonathan Allum of KBC in his daily note, The Blah! Shipping stocks have risen fast around the world even in Japan, where most of the market has barely budged for months, the Maritime Transport index is up 58%. The boom is being fuelled by the same dynamics as everything else these days: huge demand driven by Asian growth. In the case of shipping, this has pushed the closely watched Baltic Freight Index which measures the cost of chartering bulk carrier ships up to a series of all-time highs. So much does it cost 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". Imagine, says The Wall Street Journal, that you want to get a tonne of iron ore from Brazil to somewhere in 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 to $180,000 a day from $65,000 a year ago, notes Robert Guy Matthews in The Wall Street Journal.
There is one very simple explanation for this: not enough of the right kind of ships. There are plenty of oil tankers around. The size of the fleet expanded 3.8% this year and, according to Bloomberg, the global tanker fleet is forecast to increase by 32% over the next five years (when shipping titans Teekay, Frontline and Overseas Shipholding found they had turned over $2.2bn between them in 2004, they used the proceeds to order 522 new tankers). There are also plenty of container ships available to ship TV sets and fridges to the developing world, but dry bulk shippers haven't been as quick to get their orders in as the others and the result is the current shortage. Hordes of orders have now been made the order book for dry bulk ships is already 45% of the current fleet but given the typical 36-month lag between order and delivery, the bulk of the new ships won't be seaworthy before 2010.
But even if the ships were ready to go now, shipping rates probably wouldn't fall much. Why? Because these days, ships are as much about queuing as transport. The reality is that most of the ports in the busiest countries are just not big enough to handle the recent growth in traffic. At Brazilian ports, ships typically have to 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 queuing 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, says the Wall Street Journal. With China sucking up resources from Australia, much Asian demand has to be satisfied by distant South American mines.
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It is not impossible 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. Demand is overwhelming supply and, with India embarking on a massive urban infrastructure project in 62 second-tier cities, it isn't just China crying out for dry bulk companies (see below) to ship steel and concrete. As Jim Cramer notes on The Street, "this industry is one of the great bull markets in the world right now".
Don't let these two stocks sail by
One shipping company that looks especially well placed to benefit from the record levels of charter rates the industry is enjoying is dry bulk shipping titan DryShips (Nasdaq:DRYS). Because DryShips hasn't locked itself into long-term contracts it has excellent exposure to the escalating spot rate for dry bulk charters, says Jeffries' Douglas Mavrinac: 98% of the firm's fleet is expected to be available on unfixed price contracts next year. DryShips operates 33 vessels, specialising in shipping iron ore, coal and grains. The fleet is mostly comprised of Panamax ships, the largest of dry bulk vessels, which have seen their charter rate rise from $10,000 to an extraordinary $85,000 a day over the last decade. The company trades on a very reasonable forward p/e 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 (QMAR). The $1.1bn 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 fragmented market, says Ron Haruni on Seeking Alpha. The shares are up over 140% already this year, but they still trade on a forward p/e of only 11.8 times and offer an encouraging 4.6% dividend yield.
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