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Mulling over DRYS

May 16th, 2008 · No Comments

Our dry-bulk shipper DRYS keeps occupying our mind. It’s at the center of a vortex of forces, which point at different directions, but more and more, we arrive at the conclusion that the future looks bright.

We first advised a position at $75, but, on technical grounds and not trusting world economic growth, we also argued to lighten up at $85, $94, and this morning at $110. However, consider the following forces:

1) World economic growth.

  • The UN argued that this would only be 1.8% this year, down from 3.7% growth in 2007.
  • Consumer confidence in the US plunged to an 28 year low
  • Energy prices keep on rising
  • The fall in the US housing market does not seem to halt yet

We could go on (and we have made previous, even larger lists like this before. Why does this matter? Because DRYS is extremely dependent on day spot rates for dry-bulk shipping, which is itself an extremely volatile price.

Any slowdown in shipping, and this rate will plunge, as it did at the end of last year. However, since mid Januari, that rate has surged again. There must be more going on.

2) Structural increases in shipping.

Yesterday, we argued that this might be the case, especially in Asia. The hunger for commodities, steel, coal, and the like in the great building and producing boom in Asia has not been affected by the American economic problems yet, which is pretty surprising.

Chinese incomes are on the rise, but the US market remains terribly important for them.

3) Earthquake in China.

This is undoubtedly helping shipping in the short-term as supplies over land are disrupted, and in the mid term as well, as materials for reconstruction have to be shipped.

4) Credit crisis.

It’s having an effect, but (at least so far) not a negative one through reduced economic growth and shipping volumes, but a positive one through making financing new shipping capacity more difficult. This we just got from a Dutch newspaper (NRC Handelsblad, if you must know).

A previous reason for us to be sceptical for the long-term was the upcoming wave of new ships from 2010 onwards. Estimates are that until 2013, there is a full $350Billion in financing necessary for the projects underway, and serious doubts have been raised whether all of this can proceed as planned.

A full 10% of the 2500 ships (not only in dry-bulk, but also tankers and containerships) under construction now seem in doubt because of financing troubles, meaning that 10% of planned new shipping capacity might arrive later, or not at all.

This bodes well for longer-term shipping rates, as the economy will recover, and the shipping boom will last some more.

5) Shortage in deep-ocean rigs

In an article today, it turns out that Petrobas has at least 80% of the worlds deep ocean rigs. Hmm, now, that take-over of Ocean Rig will provide instant gratification, as rates for deep ocean rigs will handily increase..

6) Overbought.

As we argued yesterday, DRYS is definitely overbought, today even more than yesterday, as it has continued to climb. They’re going to report earnings Monday after the close. These are likely to be very good, but what to do with a stock which is quite heavily overbought already?

If the earnings are really terrific it will spike, and then fall back some, which would be a good moment to buy back in. It’s a bit like what happens if the unstoppable canon ball hits the unmovable wall though.

If there merely good, we think we’ll take a breather, but we have a feeling a buying opportunity will present itself sooner rather than later.

Tags: DRYS