Dry Bulk’s Turn in the Spotlight

We have enjoyed a phenomenal run with shipping investments during the past 6 months, with containerships leading the way to near-record high charter rates. However, over the past 4-5 weeks, a new titan has emerged to claim the momentum: dry bulk shippers.

Dry bulk suffered a miserable ‘lost decade’ for most of the 2010s, as a massive orderbook overhang from 2008 gave way to a multi-year slump, followed by another bout of massive private equity backed overordering from 2012-2014. These two sets of massive orders ensured that dry bulk rates would never enjoy more than a few months of strong rates from 2011 throughout late-2020.

We finally seem to have turned the corner! There were some encouraging signs during February and March as typical seasonal dips never showed up. During April, we have enjoyed a massive rally in dry bulk rates, which has brought the BDI above 3,000 and set fresh 11-year highs. Seasonally adjusted, these are the strongest rates we have seen since 2008!

No Orderbook to Worry About

Unlike in the mid-2000s and in the early-2010s, there is virtually no orderbook to speak of. Most owners and investors remain naturally skeptical after suffering through a decade of horrendous returns. Shipyards are busy building containerships and LNG carriers, plus surging steel prices and less government appetite for shipyard subsidies, means that newbuild prices are on the rapid rise.

By our estimates, large vessel yard slots are completely sold out until early-2024 and even for smaller or medium-sized ships like Ultramax or Supramax bulkers, the earliest delivery date for a new order would probably be into mid-2023. This means that if dry bulk rates continue to run, there is virtually no risk of large deliveries until 2023-2024, and customers will be forced to pay whatever the market demands.

Sounds unbelievable? Skeptics said the same thing about containerships last fall. “Just temporary COVID-related disruption,” said some. “The rates will inevitably crash just around the corner,” said others. “This is only because of port delays and other factors” was a common echo. “Shipping stocks always crash after a few months” suggested a few shorts…

Dry bulk is a different market than containers, and I am a bit skeptical of the staying power myself as well. Can you blame me? I suffer from the same recency bias and ‘investor PTSD’ as the rest of the crowd. Dry bulk has been a graveyard for investor capital for the entire past decade!

Is this time different? One thing we know for sure is that there is zero threat from the orderbook! That is something we have not been able to say since about 2002-2003. Remember what happened from 2003 to 2008?

Top Dry Bulk Picks: NMM & SB

I have shared a few top dry bulk picks in recent Seeking Alpha coverage and its worth reiterating at least two of them here: Navios Partners (NMM) and Safe Bulkers (SB).

I have covered NMM extensively as part of my containership enthusiasm. This is a remarkably interesting firm which has exposure to both the surging dry bulk markets, but also has a significant margin of safety due to their burgeoning containership charter backlog. Regardless of what dry bulk rates end up doing, NMM will enjoy massive free cash flows from at least 2021-2023, guaranteed; no other dry bulk firm can say that!

Safe Bulkers is a more apt selection if one is incredibly bullish on the dry bulk sector. In a surging market, you want lots of leverage, and SB delivers in spades! Their current financial leverage is about 60% debt-to-assets, which is a very reasonable level; however, they also have preferred equity, which brings the common equity leverage into the mid-70% range.

Remember Danaos Corp (DAC) from last fall? That stock has been more than a 10-bagger for us. They had 80% leverage into a surging market. Leverage is an incredibly good thing to have when tailwinds are strong. If the dry bulk market continues to surge, then SB will be a prime beneficiary, and I expect that she could double or potentially even triple from these prices. However, this is a much riskier rate-dependent pick. We like Safe Bulkers (SB) as an aggressive speculative pick and Navios Partners (NMM) for the more conservative risk/reward types.