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XMFSinchiruna (26.55)

Dry Bulkers Brace for Brutal Impact



May 11, 2011 – Comments (13) | RELATED TICKERS: DSX , BALT.DL , DRYS

If you own shares of any dry bulk industry stock, or for that matter any commodity exposure, you owe it to yourself to listen to Diana Shipping's Q1 conference call, and to consider the resurrected warnings from Diana's astute and seasoned President, Anastasios Margaronis.

Here is my article discussing the issue:

And here are some salient excerpts from the conference call transcript:

From the conference call transcript:

Anastasios Margaronis:

We feel that the signals emanating from the market are, indeed, confirming our very cautious expectations experienced as far back as May 2009 when we said quote, "Beyond the short-term optimism, it is difficult to envisage a scenario not centered on

a sharp freight market recession. The length and the depth of this recession will depend on the evolution of the global economy."


Later, during that conference call, we went on to say, "The challenge for most shipping companies will be to survive over the next two years or so, and then optimism will hopefully return to the industry. In the meantime, opportunities will present

themselves to acquire inexpensive assets with significant capital appreciation potential."

Truth be told, the unexpected strength of the economic recovery in 2010 and the delayed deliveries of several new building bulkers, not to mention the outright cancellations, resulted in 2010 being a pretty decent year at least after the beginning of

the last quarter. However, the inevitable cannot be indefinitely postponed regardless of the short- or medium-term factors which might temporarily at least influence the supply/demand balance of bulk shipping.


Let us have a brief look at the macroeconomic factors, which will have their influence on demand for bulk carriers of all sizes over the next few quarters. The IMF has recently lowered its forecast for US economic growth for 2011, predicting that higher

oil prices and the slow pace of job creation will restrain the pace of recovery.

US gross domestic product growth is now expected to expand at 2.8% this year, down from 3% predicted earlier on. This was confirmed by first-quarter growth figures coming in at 1.8% annual rate with government spending declining by the most since

1983 and bad weather leading to increases in food prices, which in turn has an adverse effect on consumer trending. Nevertheless, consumer spending which was up 0.7% during the first quarter grew more than had been anticipated. However, this cannot

be expected to continue going forward unless more favorable conditions return to the marketplace. In March Japan's manufacturing deteriorated at the fastest pace in at least nine years, underscoring forecasts for the economy to shrink in the aftermath of the earthquake and nuclear disaster. Factory output fell by 15.3% from February, and household spending declined 8.5% from a year earlier. (inaudible) Japan topped its growth estimates for the ending March 2012 to 0.6% from January's prediction of 1.6%.

In China the [12th] five-year plan lowers the target of GDP growth to 7% per annum over the next five years compared to actual growth over the last five years of 10.6% per annum. This implies that growth in the Chinese economy will be slower than at any

time in the last decade. First-quarter GDP growth in China came in at 9.7%, and growth for the whole of 2011, according to the economist intelligence unit, was predicted at 9%, while for 2012 the estimates for growth was 8.7%. Growth in Europe's services and manufacturing industries slowed in March after surging energy costs in Japan's earthquake clouded global growth prospects. The latest forecast for growth in the euro area, according to the economy's intelligence unit, stands at 1.75% for 2011 and the same for 2012.


Therefore, we see that overall world growth is expected to slow rather than accelerate, and unless energy prices come down fairly soon, it is logical to assume that more downward revisions of growth forecasts can be expected. And it is that omen, as

regards the market ability to absorb the anticipated increases in the size of the world bulk carrier fleet net of scrapping, which we will talk about later on.


Let's turn to bulk carrier demand. Starting with the most likely effects of the Japanese earthquake and the demand for raw material imports to that country, we agreed with the view asserted by [Galbraith] that more and more domestic production will be focused internally to aid in the rebuilding process. The power supply disruptions will affect manufacturing and production output, as well as the Japanese export trades. All the above will most likely create a drop in shipping demand for the next couple of quarters as industries and their logistical chains try to recover from the devastating effects of the recent earthquake.


Looking at steel production on a worldwide basis, the 64 countries reporting to the World Steel Association reported production of 372 million tonnes for the first quarter of 2011, which was 8.8% higher than the first quarter of 2010. Chinese steel production

has overcome pressures created by the surge in steel stockpiles during February and March and going forward is expected to increase modestly, thus supporting the overall growth figures referred to above.


As for iron ore, Clarkson predicts an increase in total world imports of 7% during 2011, bringing the expected total volume to 1.055 billion tonnes, a new world record. Very little growth is expected in the supply of Indian iron ore to China, and again, according to Clarkson, that would make it increasingly hard for Chinese steel mills to find greater export volumes from elsewhere. At the same time, according to Commodore Research, about 81 million tonnes of iron ore is currently stockpiled at Chinese ports, an increase of 1.4 million tonnes or 2% from just a week ago. Stockpiles have remained at near record levels since the end of January, which has caused Chinese iron ore pictures to fluctuate rather wildly during the last few months. Overall Chinese iron ore demand has remained very firm, however, as steel production has been maintained at a high level.


Coking coal exports are expected according to Clarkson to reach 255 million tonnes in 2011, an increase of 5% over 2010. Japan's coking coal imports are expected to reach 77.4 million tonnes during 2011, representing a year-on-year increase of 6%. Japan

is expected to use larger quantities of steel this year for its reconstruction efforts, but Clarkson does not believe that this will necessarily lead to importation of larger volumes of raw materials used in the production of steel. It is more likely that the

country's steel mills will export less steel than in recent years, giving priority to the domestic demand for steel in the construction of housing, roads and other infrastructure projects ahead of overseas demand. Obviously this will in turn means that Japan's

overseas clients will have to get their steel from elsewhere, so the net result on the overall transportation of raw materials is very difficult to predict.


According to Clarkson, thermal coal exports are expected to reach 686 million tonnes, which, if realized, will be 4% higher in 2011 than in 2010. It now appears that the number of coal-fired power stations in Japan were more seriously damaged than

previously thought, and therefore, the country's coal-fired power generating capacity will be adversely affected over several more months. This will have an analogous negative effect on steel coal imports to that country for the rest of the year. Thus, Clarkson's projection for Japanese imports of steel coal is 126.5 million tonnes, up just 1% from 2010. However, in the long run, the energy mix in power generation will change in Japan as a result of the damage to the nuclear plants. Thermal coal and LNG are according to Clarkson most likely to fill the immediate and longer-term gap.

According to Clarkson, overall bulk commodity shipments are expected to increase by 5% in 2011 compared to 2010 and come in at just under 3.5 billion metric tonnes.

Let's turn to bulk carrier supply. In looking at projections of the world bulk carrier fleet, it is inevitable to start by looking at the order book and try and make the reasonable guess on how many vessels will actually be delivered and when. The total bulk

carrier for the book stands at 260.8 million tonnes deadweight, which is a rather daunting 47.3% of the existing fleet. The 604 Capesize bulkers on order represent about 54.5% of the existing fleet, while the 928 or so Panamaxes are just under 54% of the existing Panamax fleet. According to the contractual delivery date, deliveries are fairly evenly spread out between 2011 and 2012 with the 2012 Panamax

delivery book looking the strongest of them all at over 33 million tonnes deadweight.

In our model, we have assumed that about 40% of Capesize bulkers and an equal percentage of Panamaxes will either never be delivered or their deliveries will be delayed. This will mean that about 30 million tonnes deadweight worth of capes and

around 16 million tonnes of Panamaxes will be delivered during 2011. These ships represent gross additions to the world cape fleet of about 14% and for Panamaxes an additional 12%.

Could possible scrapping come to the rescue? To date about [3.7] million deadweight tonnes of capes and only 800,000 tonnes deadweight of Panamaxes have been scrapped. If this trend continues for the rest of the year, the net additions to the cape fleet will be reduced to 16 million deadweight tonnes, bringing the net fleet increase to around 7.5%. It has to be kept in mind, however, that the average days of capes heading for the scrap yard during 2010 and so far in 2011 has been about 26 years. Considering that only 6% of the existing cape fleet is over 25-years-old and a further 10% of the fleet is between 20- and 25-years-old, the scope of further scrapping in that size range is fairly limited unless there is a total collapse of our earnings going forward.

Finally, as mentioned by Howe Robinson in their annual dry bulk review for 2010, never in the past has scrapping taken place ahead of the shipping recession on a sufficient scale to prevent it. Under the 40% slippage assumption for Panamaxes, the additions to the fleet net of scrapping in 2011 will be brought down to 13 million deadweight tonnes, an increase of 10% of the existing fleet.

New building contracting has been another cause for concern. During 2010 newly 90 million deadweight tonnes of new buildings were contacted according to [Morris Brokers]. This has been the second highest year for dry bulk new building contracts, the

highest being 2007 at around 128 million deadweight tonnes. So far in 2011, the trend is certainly more encouraging, but the 2010 orders if they get ordered will be delay the freight market recovery we all anticipate by several quarters.

The growth of the fleet this year has seen 20.1 million deadweight tonnes delivered during the first quarter alone. Clarkson allowing for late reporting and slippage projects that 79.7 million deadweight tonnes will actually be delivered in 2011, which

is more or less the same as the tonnage delivered in 2010. This represents an overall fleet growth of 12.6%, which is difficult to reconcile with the projected 5% growth in demand.

Even if our optimistic cancellation (inaudible) slippage figures materialize and only 6% of the fleet on order during 2011 is actually delivered, the numbers are still unpleasant. We should keep in mind that nearly all vessels scheduled for delivery this year have seen construction commence, so cancellation of their deliveries is highly unlikely. The most we would realistically hope for would be a delay of some deliveries into 2012. As we have seen in the past, this will just delay the noticeable further deterioration of the supply/demand balance.

One would have expected a rather dramatic slide in asset values given the drop in bulk carrier earnings witnessed so far this year. This has not happened. So far this year we have seen a relatively modest drop in the value of modern capes and a similar drop in the value of modern Panamaxes. At the end of 2010, a modern cape was worth, according to Clarkson, approximately $50 million, even though asking prices were considerably higher, and the latest value of a similar ship today is just under $45 million.

For a modern Panamax, the values have dropped from $36 million at the end of 2010 to just under $33 million today. However, the values of very old vessels have gone up with a rise in scrapped values, which is somewhat surprising because they still do command a significant premium through their net scrap values.

We agree with the view expressed by Howe Robinson that the dry bulk market continues on a long-term cyclical downswing as the cumulative effects of fleet growth outpaces cargo growth. These conditions are expected to continue through the rest

of the year and into 2012. The Capesize vessel is most vulnerable, while Panamaxes should suffer less. As far as this year is concerned, supply/demand balance for capes is less favorable during the first half compared to the second half, while for Panamaxes the situation is the reverse.

In this climate our Company intends to continue its acquisition strategy and acquire vessels with conservative leverage. This Forex policy will continue throughout the thrust of the shipping cycle, and we are confident that Diana Shipping will not only survive this downturn, but also manage to emerge a larger company with a much greater earnings capability and profit potential when the market starts improving.



13 Comments – Post Your Own

#1) On May 11, 2011 at 8:20 AM, XMFSinchiruna (26.55) wrote:

And on a note unrelated to shipping, I found this snippet from Sinclair's latest interview at KWN pretty timely:

With gold and silver still recovering, today King World News interviewed the legendary Jim Sinclair.  When asked about the volatility in gold and silver Sinclair replied, “The bonds are indicating that the psychology which is most supportive to gold is returning to the market place.  And the action in gold after the recent reaction in gold, is so stout, so strong, as is silver itself, so stout, so strong in its recovery, that the only conclusion that you can come to is that we have not established a top in silver and clearly we’re nowhere near a top in gold.”

Here are a few more snippets from Sinclair’s interview:

“The recovery in silver, the fact that it got plowed down, but its character now seems to deny the recent break, I think silver is acting very, very well and as previously stated, I don’t believe we’ve seen a top in silver yet. 

When asked about gold specifically Sinclair stated, “$1,764 is calling on gold now and the market is reacting to it.  It is calling, it is the magnet pulling most heavily on gold right now.”

When asked about the shares Sinclair had this to say, “I know what kind of money these companies are going to make.  I understand what kind of cash flow that can be generated from this type of price on gold.  There is no way on earth at this point that the hedge funds (short miners) are going to be correct.  In fact they are the ostriches with their heads in the sand.  No share will remain under pressure of a hedge fund when it begins to put out the type of cash flow that the price of gold now will result in.”


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#2) On May 11, 2011 at 9:35 AM, catoismymotor (< 20) wrote:

That is very interesting.

If I may I would like to add that on the east coast of the USA and Canada there is only one port that can accomodate the Super Panamax ships: Norfolk, VA. NSC is perfectly positioned to take advantage of this peculiarity.

LNG was mentioned above as a possible bright spot in shipping at this time. I've been watching GLNG since late January of this year. It has shot up 125% since October 2010. I think it can double from here.

And thanks for the additional passage from Mr. Sinclair. It will be interesting to see just how right he is given time.

All the best,


P.S. - I don't own, or plan to own, NSC or GLRE in the next six months.

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#3) On May 11, 2011 at 10:27 AM, reinman60 (< 20) wrote:

When asked about the shares Sinclair had this to say, “I know what kind of money these companies are going to make.  I understand what kind of cash flow that can be generated from this type of price on gold. 

AUY's announcement yesterday is a great example of this.  They increased their dividend by 50%, and their exploration budget by  25%.


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#4) On May 11, 2011 at 10:33 AM, rofgile (99.40) wrote:

Hi TMFSinchiruna,

  Good article and interesting information.  I'm still investing in dry bulk shippers and watching these carefully.  The issues of oversupply, natural disasters, and economic slump (not anymore) continue to negatively affect these companies.

  Sometimes I wonder if the dry bulk shipping industry is similar to farmers leading up to the great depression.   In order to keep a livelihood, the farmers would plant greater and greater farmland every season to eak out what meager profits they could with depressed crop prices.  In turn, they continued to oversupply the market and lead to further price decreases.

 Dry bulkers continue to have lower shipping rates due to oversupply of ships.  In turn, they buy more ships to increase revenues on increasingly smaller margins.


 At some point, fuel costs combined with oversupply = no profit or negative profits.  Asset values for the companies fall as the values of ships plummets since there is oversupply and companies will have to shed them at any cost.  

 Its a nasty situation, and I am not sure about how it'll work out.  I guess the winners are those who need dry goods shipped?  Who would those players be?


 (p.s. I'm still invested in shippers because there are cyclical variations in the BDI, starting to rise every April for about 6 months so I'm testing whether that'll still happen this year) 

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#5) On May 11, 2011 at 11:19 AM, L0RDZ (91.32) wrote:

Raise shields ???


Scotty ??? where are my engines ?  where is my warp drive ?

 All  hands brace for impact  :)

 I think only  the strong will survive  :)



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#6) On May 11, 2011 at 3:04 PM, MegaEurope (< 20) wrote:

“The recovery in silver, the fact that it got plowed down, but its character now seems to deny the recent break, I think silver is acting very, very well and as previously stated, I don’t believe we’ve seen a top in silver yet."

Is he looking at the chart upside down?


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#7) On May 11, 2011 at 4:25 PM, LiveOakGrey (< 20) wrote:


 With the talk about a magnet calling gold strongly at $1,764, is there any talk about what the magnet for silver would be?

 Another issue that bothered me a lot was how much physical silver (and gold) rose, while my shares/options of SLW got crushed back to the same starting point day after day the past few weeks.  I ended up being trapped in high water marks for options that never were revisited, while the physical price was shooting up each day.

Truly, there's no way profit taking could happen each day, but only in stocks like that, while the physical bullion continued to rise to record levels.  Nor is the argument that the prices were rising strictly due to new investors (who only got into gold/silver coins, and not into stocks/options)... if that were the case, then the stocks and options themselves would never have reached those high water marks, in the first place!  Clearly, the stock investors thought the stocks were worth those 'high' prices, and the gains that should have been made by the stocks when the underlying metals they extract were rising, were being sytematically suppressed each and every day back to square one - until some pretext arose to crush the market as a whole in a 'correction,' that also had no basis in any changes in the world economic situation.  Any thoughts? 

I'm still invested in SLW and a few other stocks, but I'm concerned about the sell in May and go away scenario.  Does that even apply in this massively inflationary environment, with fears of Greek departures from the European economic union, or a bail out for them?  Is it foolhardy to be invested in options for silver/gold during these summer months?

Thanks as always for your advice.


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#8) On May 11, 2011 at 6:17 PM, XMFSinchiruna (26.55) wrote:


For me personally, I think options are always foolhardy. I'm delighted to further enhance my exposure to gold and silver into this bout of weakness, but never would I consider doing so in a way that linked price performance to a specific time scale. Placing oneself at the mercy of market timing, it seems to me, is akin to placing oneself at the mercy of institutional shorts. Not an enviable position, in my opinion. 

I am not concerned about seasonal factors. What I am alert to is the potential for near-term downside in the context of either a major post-QEII market sell-off, or an extension of this mini-USD-rally fed by another phase of the Euro crisis saga. After some determined bargain hunting in recent days, I now hold less cash than I would ideally like to hold, but for a long-term guy like mne the only downside I perceive is the specter of missing out on even greater buying opportunities.

So in conclusion, while I personally consider options foolhardy, I can imagine few scenarios more foolhardy than approaching this particular summer with little or no presious metal exposure. 

Those are my $0.02. Fool on!

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#9) On May 12, 2011 at 1:25 AM, traderbach (< 20) wrote:


 I heard an 'expert' interviewed on KLX1070 (LA) today who said he wasn't surprised at the fall of PMs as anything (silver) that rises x4 in such a short time is definitely a bubble & must fall.  He didn't address the unprecedented financial crisis that the world finds itself in now, or to the likely redress of the inbalance in the traditional gold to silver ratio, or to the burgeoning industrial uses of silver, or to the actual increasing scarcity of the silver supply given that there may be only 20 yrs of silver left obtainable by conventional mining methods.  I am holding what I have in PMs because I agree with much of what you have laid out in your own opinions & because my gut tells me PMs have a long way to go yet.  I tend to trust my gut these days once I have done due diligence.  Anyway it is nice to hear the consistency & calm that emanates from you when many are focused on the micro rather than the macro & freaking out.  I think one needs a steady rudder in these high seas.  As Kipling said "If you can keep your head when all about are losing their's... ".   Well, looking forward to the next episode in your PM series &, as always, grateful to have suggestions for further study from a full time analyst who instinct & time have told me is not only accurate but one of the good guys.

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#10) On May 12, 2011 at 6:08 AM, nilesgold (21.75) wrote:

Sinch & LiveOakGrey,

Regarding the use of options, have you considered selling puts?  In the right situations I've become a big proponent of this, usually those with a strike price near the money and with expiration in 2 months or less (provides greater time value).  It does limit your upside significantly, but it gives you a small downside cushion, if the stock doesn't change price you still make money and if the shares end up being assigned you will have paid less than if you bought those shares outright.

Keep in mind when doing this I usually sell a small number of puts, no more than I would be comfortable owning (in shares) if the price drops and the shares are assigned to me.

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#11) On May 12, 2011 at 9:16 AM, XMFSinchiruna (26.55) wrote:


I will never use an option, a put, nor any other such device. I am confident in my ability to create wealth the old fashioned way ... by buying stocks on the cheap and selling them higher.


Thank you for the kind words. Bravo for seeing through the illogic inherent in a conclusion that anything rising a lot must therefore be a bubble. If I could blink my eyes and make one sweeping change to the financial world, it would be to retire the word "bubble" altogether, and replace it with two separate terms that treat its two conflated definitions distinctly (i.e. instances where prices rise a lot, and instances where they rise a lot more than properly assessed fundamental conditions would warrant). Given the word's presently confused usage, I fund it worse than useless ... it is damaging to investors.

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#12) On May 12, 2011 at 9:26 AM, reinman60 (< 20) wrote:

The biggest bubble I've ever seen is in the use of the term "bubble".

Also, black swan is being bandied about so much, its lost whatever meaning it had.

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#13) On May 12, 2011 at 12:14 PM, nilesgold (21.75) wrote:

Fair enough... for me, when I sell puts I treat it as if I am buying stock below market price.  A lot of times I will do this with stocks that I already own some of the old fashioned way.

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