Today's Deceptive Rally in Dry Bulk Shipping
Jan 4th 2013 5:26PM
Updated Jan 4th 2013 5:34PM
If you thought the fiscal cliff deal was enough to jump-start stocks in 2013, just wait until you see what shipping stocks are doing.
It was a full-on market rally for shippers today, with stocks soaring. DryShips saw shares skyrocket an astronomical 25% today, while many competitors also recorded strong gains. After the gloomy tide that took over the shipping industry following the recession, are shippers headed for new heights -- or should you stay away from today's surge?
Stocks and rates charging higher
An attractive bit of news drove investors into a short-term frenzy today, hoping to grab profits while shipping stocks are relatively cheap. Rates for shipping iron ore jumped the most in the past eight weeks today, and the outlook for 2013 is that rates should keep on rising -- ostensibly driving more revenue for shippers.
What's behind the rate hike? Perhaps, unsurprisingly, it's the same force that has dictated much of the raw materials trade in the Pacific -- China's infrastructure growth; in particular, the nation's steelmakers. China's steel industry is the world's largest and, with renewed infrastructure commitments from the nation's stimulus program, steel companies in the world's second-largest economy are stocking up. Said companies are also adding to inventories before stormy, cold seasons begin to hit suppliers in Australia and Brazil.
These factors have combined into a perfect storm for investors, who are piling into shippers near and far. Navios Maritime rose more than 5% -- and that's on the conservative side of the industry. Eagle Bulk Shipping shot up 25% to match the aforementioned DryShips. With iron ore prices expected to remain high in China for the short term, traders looking for a quick buck have spotted opportunity.
Today's deceptive rally
For the long-term investor, however, buying into today's spree is not the right move to make.
The Baltic Dry Index -- the key measure of raw material shipping prices -- is still at bottom-of-the-barrel lows. The index today sits at a level of 700 -- down more than 50% from early January 2012, when the index was over 1,400. That's also far below what it was just in early December, when the index was over 1,000. Such a low mark indicates that the outlook for prices still isn't good, despite today's rate optimism -- the index already averaged its lowest mark since 1986 last year.
The economy at large isn't exactly helping out shippers, either. With Europe still stuck in a financial mess, don't expect a burgeoning need of raw materials across the Atlantic. Housing has picked up in the United States somewhat, but with sequestration up on the political docket in just a few months (again), there's no telling how hard the budget hammer will hit America's economy later in 2013.
With trade picking up as the economy begins to improve, however, things aren't all rising for shippers. Demand for fuel is picking back up, which will send prices higher -- increasing costs for cash-strapped companies. Shipping industry consultant McQuilling Services LLC expects prices for bunker fuel -- what shippers use to power their fleets -- to hit an all-time high in 2013.
As for China? While infrastructure spending might be picking up across the Pacific, the world's second-largest economy still faces a number of challenges of its own. China's GDP growth has slipped significantly from double-digit highs in 2010. While economists polled by Bloomberg predict the Chinese economy to post accelerating growth for the next six months after seven straight quarters of decline, it's tough to predict just how long stimulus spending can keep up the country's infrastructure boom. Any decline there would seriously dent shipping revenues across the industry.
Winners and losers in a struggling industry
What about major shipping companies themselves? They have plenty of ground to make up, as well. In the past, I've covered the debt-laden financial mess that DryShips is in, but there are few options that make sense in the long term for shipping investors. Eagle Bulk Shipping faces a total debt-to-equity of 183% -- far more than some of its competitors -- and the company's small size in a sector where bigger is better doesn't inspire confidence.
If you're looking for safer long-term picks in the shipping industry, consider Navios and Safe Bulkers . These two sport manageable debt loads and strong dividend yields with reasonable payout ratios. It's unlikely that many shippers will provide substantial growth with the world economy still stuck in neutral, but these two stocks offer promise for income investors and those looking for safe picks.
Also, keep an eye on the likes of Aegean Marine . With fuel prices on the rise, this fuel logistics company could benefit where shippers are poised to feel the pain. The company's inventory growth speaks of increased demand on the horizon -- and analysts estimate that Aegean Marine will report significant growth in profit this year.
An eye for the long term
Short-term traders may be going crazy over today's rally, but long-term investors know better than to engage in the frenzy. The shipping industry is still struggling to stay afloat, with higher fuel prices dragging on bottom lines. While the economy may be picking up somewhat, problems in Europe, China, and elsewhere are far from over -- and, until real global growth shows up, shippers will continue to chug along slowly. There are still good stocks in the shipping sector, but don't be caught up in today's rally. Take the time to find the best companies and invest for the future.
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The article Today's Deceptive Rally in Dry Bulk Shipping originally appeared on Fool.com.Dan Carroll 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.
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