Given all the focus on trade between the U.S. and China, it is interesting that the financial media seem to have missed the most salient indicator. No, it’s not a tweet or a summit meeting, it’s an index; the Baltic Dry Index, to be precise. With a London fixing today of 1,622, the BDI has risen a jaw-dropping 22% since June 22. It is clear that the market for seaborne cargoes of coal, iron ore and grains is red hot right now.
I’ve followed shipping stocks long enough to have grey hair, but I believe this move is real, and shows the true movement of the global economy, not one made to impress voters. Yes, China is still buying raw materials to produce finished goods, and while China is by far the largest consumer of dry bulk goods, the historical rule-of-thumb is that the U.S. only accounts for 4% of global dry bulk trade.
So focusing on Trump and Xi is missing the point. The dry bulk fleet owners I talk to are more bullish on industry fundamentals than they have been for several years, and it is a simple matter of supply and demand. Dry bulk scrappage rates have come down from the record levels of 2016, but still remain elevated versus historic norms and the order book is at very benign levels. Commercial bank financing for the dry bulk sector dried up completely during the crash of 2015-2016 and those loans that weren’t made equate to ships that aren’t being built now.
The shipping industry has the worst reputation among any sector I follow for over-ordering during the good times, but soft credit markets may have finally given these primarily Greek owners some religion.
My current favorites are Navios Maritime, DryShips and Star Bulk. Other names of note include Safe Bulkers, Diana Shipping and Scorpio Bulkers.
These names tend to show seasonal strength as the third quarter progresses and bulk rates improve, but it seems like this year the rates are ahead of the equities, and performance among dry bulk stocks has been mixed for the past month. This is the ultimate cyclical industry, and we’re at an advantageous time in the cycle, so the fact that all the stock prices are not peaking shows the buying opportunity remains.
All of these names trade data significant discount to the “steel value” of their fleets, the net asset value (NAV). Any fleet’s NAV will increase as long-term dry bulk futures increase, as they have along with the short-term spot rates.
Navios, when taking into account the value of its holdings in other shipping subsectors, is trading at at least a 75% discount to steel value, and that’s why I went heavily into the name several weeks ago. Navios may be trading at the most ridiculous discount, but each of the six names I mentioned is trading at a significant discount to NAV, and I would advise researching the individual names further to discover the value.
One note of caution is that not all shipping stocks are created equal. While dry bulk freight rates have popped, rates for oil tanker shipments remain near cycle lows and container ships are still drawing day rates at levels below historical averages. So, make sure you are buying stocks of companies that transport bulk cargoes, and make sure to hold onto these stocks despite all the sturm und drang about a trade war between the U.S. and China.
There will be a day for shipping stock investors to shift from dry bulk into the extremely beaten-down tanker sector, but today is not that day. When industry fundamentals are rising, laser focus is the most lucrative strategy.