The phenomenal run of shipping strength is ongoing, even amidst some more global concerns surrounding the Delta variant. Containership rates continue to set fresh record highs, but dry bulk rates are also quite strong, yet they haven’t received as much investor attention… yet. I believe this might change this week and into next week as the market is about to receive a flurry of dry bulk earnings reports and updated Q3-21 guidance.
Thus far, we have seen reports from Safe Bulkers (SB) and Navios Partners (NMM), with the former blowing out analyst expectations ($0.31 adj EPS versus $0.22 analyst average) and the latter a far more complex story. Safe Bulkers was the only mainstream pure dry bulk result so far, and the earnings were very encouraging. In fact, SB stock has appreciated about 10% since last week, even with the higher disclosed ATM usage.
This week, we have incoming reports from Diana Shipping (DSX) on Tuesday followed by Eagle Bulk (EGLE), Genco Shipping (GNK), and Star Bulk Carriers (SBLK) on Thursday. All four of these firms are set to report strong results and DSX is in the midst of a significant share tender. More importantly than the Q2 results will be the Q3-21 fixture guidance as well as any commentary on potential shareholder returns.
In particular, we expect SBLK will pay a significant dividend for Q2, and we expect that both Eagle and Genco are getting much closer to their own significant payouts. If not by Q4-21, then certainly by Q1-22, we should expect to see massive cash distributions from both of these firms. As mentioned, Diana has been active on the repurchase front already!
Too Much Focus on Capes vs. Midsize
In a recent full-length shipping market webinar (dry bulk specific commentary starts about the 19-minute mark), I covered how the dry bulk markets are incredibly strong, yet far too many investors and analysts are focusing almost exclusively on the volatile Capesize rates.
I believe the media (and investor) obsession with Capesize rates has masked a lot of the underlying strength and has caused a near-term detriment to dry bulk investors, since stocks have been more volatile and weaker than if they traded closer to the consistent midsize strength.
This is most obvious for a firm like Eagle Bulk (EGLE), which imploded over the past month, losing over 35% of share values in just 3 weeks, despite 100% exposure to midsize spot rates which have been nothing but phenomenal.
Due to a mixture of Chinese policy changes and disappointing export volumes from Brazil during 1H-2021, Capesize rates have been far more volatile and overall subdued compared to the medium and smaller-sized vessels. I believe the smaller and medium vessels are far more representative of the current market conditions. The relative differences are shown below:
Capesize: Volatile Due to China-Iron Dependency
The largest benchmark is for Capesize vessels which are 180k dwt and higher. These massive vessels move the majority of the world’s iron ore trade and are also responsible for a significant portion of coal flows. These rates have been volatile this year in response to China’s knee-jerk changes in policy.
The 2-year chart is shown below. Rates are clearly stronger than during the COVID-19 trough from Feb-June 2020, but there’s not much to see here.
If we zoom out further to an all-time chart (since 1990), we can see that today’s market isn’t that notable. Rates are good, but nothing super strong.
Handysize: Massive Rates, No Signs of Slowing
The aforementioned webinar covers all the segments, but for the largest contrast, we will focus on the smaller Handysize (under 50k dwt) bulkers. We can just skip straight to the all-time chart (back to 1990) for this one.
Rates have been on a massive spike since late-2020 and the current levels are surpassed only by a 12-month stretch in 2007-2008. This chart is shocking, and truly underscores how strong current dry bulk markets are!
Conclusion: Buying Opportunity in Dry Bulk
I am personally very bullish on dry bulk equities and recently reiterated another ‘sector buy alert’ to members of Value Investor’s Edge. For disclosures, my current dry bulk positions in private accounts include Eagle Bulk (EGLE), Genco Shipping (GNK), and Navios Maritime Partners (NMM).
Although broad market concerns (e.g. Delta variant) may continue to serve as a near-term headwind and share pricing volatility might continue, I expect this week’s earnings surge to provide additional pricing support. Dry bulk equities continue to trade at significant discounts to NAV even as free cash flows are surging and the majority of firms have very clean balance sheets.