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Is it Time to be Optimistic for the Future of the Dry Bulk Market?

Fani is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Over the past four years, investors who found themselves stuck with shipping stocks have plenty of reasons to be disappointed. The performance of the Baltic Dry Index is a perfect indicator of how depressed the industry has been. Throughout 2012, the index moved around bottom-low levels and remained below 1,000 points posting the lowest average performance in over two decades.

The slump of the dry bulk sector 

The recessive economic conditions in the developed and emerging markets and the resulting low demand for dry bulk commodities prompted an oversupply of vessels. Hence, freight rates marked a sharp deterioration and many ship owners were forced to employ their vessels below operating expenses.

For instance, for the first nine months of 2012, DryShips (NASDAQ: DRYS) saw its time charter equivalent (TCE) in the dry bulk segment, a measure of the average daily revenue performance of a vessel on a per voyage basis, decline by 35% compared to the same period in 2011. The company reported a 25% drop in total voyage revenues for the period, and a net loss of over $51 million for the third quarter alone. As a result, DryShips failed to enhance shareholders value. Over the past year, the stock remained trapped in a continuous downtrend and was outpaced by some of its major peers.

<img src="http://media.ycharts.com/charts/5dfb1107ee64f27a9b4567f7ef32d564.png" />

DRYS data by YCharts

The oversupply problem

The main concern among ship owners is the prevailing oversupply within the sector. 2012 was the year that scrapping activity reached record levels. For the period January-November 2012, demolition activity was up by almost 60% in terms of tonnage scrapped and almost 40% in terms of the number of vessels compared to the same period in 2011. Many ship operators, such as Japanese shipping firms Kawasaki Kisen Kaisha Ltd and Mitsui O.S.K. Lines Ltd, decided to postpone plans to expand their dry-bulk fleet. Thus, the imbalance between global demand and tonnage supply should have started to show signs of improvement. However, at the same time, the depressed prices in the second hand vessel market and the all-time low prices of new buildings kept buying interest elevated. For some ship owners, investing in growing their fleet, despite the current market environment, actually made sense.

Diana Shipping (NYSE: DSX) has one of the healthiest balance sheets in the space. It has a strong cash position and long-term liabilities that are perfectly manageable. Thus, Diana remains committed to an aggressive growth strategy aiming to capitalize upon opportunities that will provide fruitful returns once the industry starts to rebound. Throughout 2012, the company purchased eight new carriers and increased its vessels' net book value by $154 million.

Navios Maritime Partners L.P. (NYSE: NMM) is also one of the most financially balanced players in the space. For the fourth quarter of 2012, the owner and operator of dry cargo vessels, enhanced its time charter revenues by $2.3 million. This quarterly performance was primarily attributed to three vessel acquisitions that supported a meaningful increase in available days of the fleet. Angeliki Frangou, Chairman and Chief Executive Officer of Navios Partners, has stated that following a conservative business model of fixing long-term contracts when the market is healthy has provided flexibility against short-term market volatility. As a result, the company managed to remain at the forefront of the industry while investing in improving its fleet employment profile.

Reasons for optimism

Looking forward into 2013, there are several signs that could allow some optimism over the future prospects of the dry bulk market. A recent report by BIMCO indicates that the demand aspect of the equation is the one that will determine whether the dry bulk market will return to a healthy performance in the short-term. According to the report, China's growing hunger for iron ore and especially thermal coal will pull the dry bulk market out of the slump. For 2013, Chinese iron ore imports are expected to increase by 7.5%. Chinese thermal coal imports are estimated to increase at an average rate of 12% y-o-y to 137.8 million tons. India is also expected to be a major component of the growing demand for thermal coal by being the second largest importer worldwide.

<img src="/media/images/user_14566/717afe4c1e49462ca4f532eab9381aa6_large.png" />

Overall, the report suggests a positive outlook for the shipping industry starting from 2013. This optimism is built upon expectations for upward trends in global GDP and global trade volumes. For 2013, IMF estimates reveal a significant acceleration in emerging markets' economic activity. In particular, IMF indicates 8.2% growth in China, up from 7.8% in 2012. India's economy is estimated to grow by 6% this year, as opposed to 4.9% in 2012. Economic activity in Brazil is expected to reach 3.5%, up from 1.0% in the past year. World trade growth in goods and services is also expected to follow an uptrend of 4.5%, up by 1.3% compared to 2012.

The bottom line

To sum up, emerging markets' commodity demand is the key driver behind the renewed hopes for a recovery in the dry bulk market. The industry as a whole has been under pressure for over four years causing investor sentiment to deteriorate. However, emerging economies' appetite for raw materials is very likely to provide a solid lift in average trade volumes and consequently, a pick-up in seaborne transportation activity. Longtime investors of shipping stocks could be surprised by positive returns as expectations for a recovery in the shipping industry are starting to shape a rewarding outlook.

FaniKel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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