But relatively low rates indicate imbalances still prevail across most of the sector, which will likely be exacerbated over the near term by the disaster that has befallen Japan. Mavrinac estimates that before the earthquake, nearly 9% of crude tankers were destined for Japan, as were 16% of all dry bulk, and the country's exports accounted for 10% of container shipping.
Michael Webber, senior shipping analyst at Wells Fargo, estimates that immediately following the disaster, one-quarter of Japan's oil refining capacity was knocked offline and five large steel mills, which produced more than 15 million tons of steel per year, went dark. "Until the radiation threat is resolved and power restored to normal levels," posits Webber, "these key industries will remain operating well below capacity, which will significantly reduce import volumes."
Dry Bulk
As its name suggests, dry transport involves raw commodities such as iron ore, coal and grains. While there has been steady demand from key growth areas including China and India for these commodities, the collapse in day rates were in part attributed to massive shipping disruption caused by widespread flooding across the commodity-rich zones of Queensland, Australia. Forty percent of the coking coal for steelmaking worldwide comes from this Australian state.
There was also weather-related disruption in Canada's St. Lawrence Seaway, which is a major route for iron ore flows. And the short-term hit taken by Japanese imports and exports will hurt.
But perhaps the most systemic hit is coming from the 25% increase in the number of capesize ships that are expected to come online this year. This will push the size of the fleet to more than 1,240 boats, according to London-based shipbrokers Simpson, Spence & Young. This would suggest that dry bulk shippers may not be able to regain pricing power anytime soon, at least not without a significant surge in demand for certain raw commodities.
With rates gapping below costs, dry bulk shipping is exposed to greater counterparty risks than other shipping industries, explains Webber. In the current environment, shipping contracts may be broken or significantly renegotiated. Webber's outlook is that dry bulk will at best be flat over the intermediate term, with only pockets of opportunity.
Jefferies' Mavrinac thinks the massive rebuilding of Japan and the significant increase in demand for coal to make up for the loss in nuclear power will likely be catalysts for dry bulk shipping.
FBR Capital markets shipping analyst Doug Garber believes that with investors already anticipating asset price deflation, dry rates may see a catalyst from receding floodwaters in Queensland and a slowing in the actual number of vessels that will be ordered. "The overhang from a large order book should diminish in a year as deliveries outpace orders," says Garber.
Garber likes Diana Shipping (DSX) due to its strong balance sheet, strong contract coverage, disciplined investments approach and potential to grow in a weak asset price environment. He also likes Star Bulk Carriers (SBLK) for its attractive valuation at 0.8 times NAV and 7% dividend. However, shares of both companies have barely budged since early 2009 after they lost two-thirds of their value during the recession.
Tankers
While tanker rates have fluctuated over the past several years with shifting demand for crude and refined petroleum products, Mavrinac expects crude inventories to continue to decline and OPEC production to increase production by the middle of the year. "Global oil demand continues to surprise to the upside," says Mavrinac, and "this trend should provide a significant boost to tanker demand." He sees limited downside risks since charter rates are already very low. And shares are trading at discounted valuations despite evidence of significant potential positive near-term catalysts.