Container shipping companies, unlike the dry bulk shippers DryShips Inc. (NASDAQ: DRYS), Genco Shipping & Trading Ltd. (NYSE: GNK), Excel Maritime Carriers, Ltd. (NYSE: EXM), and others, are mostly privately held or traded only lightly over-the-counter in the US. The world’s largest container shipper is Denmark’s AP Moeller-Maersk, which is expected to see profits fall by -25% this year as container rates have collapsed. Two publicly traded container shippers are Hong Kong-based Seaspan Corp. (NYSE: SSW) and Greece-based Danaos Corp. (NYSE: DAC).

For the shippers, part of the problem is an over-supply of ships. The container fleet has grown 17% since 2007 and new orders equal nearly 28% of existing supply. Dry bulk shippers have placed orders that would increase capacity by 36%, so the container shippers are a bit more cautious than the bulkers.

The main reason for the slowdown in container shipping is wariness on the part of retailers for the 2011 holiday season. Retail profits in the second quarter gained an average of 11%, the smallest increase in two years. That was due primarily to steeper discounts on goods as retailers cleared out inventories in the quarter to make room for the back-to-school season.

By and large back-to-school customers showed up as hoped. Target Corp. (NYSE: TGT) saw its total sales rise 5.4% in August compared to August 2010. Macy’s Inc. (NYSE: M) posted higher sales as well, and would have done better except for Hurricane Irene. Wal-Mart Stores Inc. (NYSE: WMT) has raised its full-year profit outlook, but most of that is due to increasing sales overseas.

But as news about the US economy and unemployment continue to dominate the front pages, there is some concern that skittish customers will hold back on holiday shopping until retailers put out their markdowns. And uncertainty about customers’ willingness to spend is dampening enthusiasm among retailers as well.

The National Retail Federation acknowledges the slowdown in shipping, but notes that last year holiday merchandise was shipped early as shippers feared a container shortage would hamper deliveries. The group expects September cargoes to jump by 10.4% over September 2010 and October shipping to rise 8%.

A hugely successful holiday season doesn’t appear to be in the cards for US retailers, but no one expects the kind of retail smackdown we saw in 2008. That’s should be some comfort to retailers.

Paul Ausick

The company will acquire Ocean Freight, Inc. (NASDAQ: OCNFD) for a total consideration of $19.85/share, more than double Ocean Freight’s closing price of $9.47 yesterday. The deal includes $11.25 in cash and 0.52326 shares of Ocean Rig UDW Inc., a Norwegian company that trades over the counter and which closed yesterday at $16.44 and is 78% owned by DryShips. As part of the deal, Ocean Rig shares will be listed on the Nasdaq GS when the deal closes, now expected to happen in the fourth quarter of this year.

Shipping companies are currently suffering from a rapid expansion of their fleets before the financial crisis that has left them with an oversupply of carriers. Daily rates are quite low, although the Baltic Dry Index has risen recently from a nadir of about 1,100 to around 1,300. In May of 2008, the BDI rose to nearly 12,000.

The purchase seems a bit odd, to say the least. DryShips has been sinking time and money into building an ultra-deepwater drilling fleet at Ocean Rig. Ocean Freight owns six dry bulk carriers, four Capesize and two Panamax, and has contracted to buy five newbuild Very Large Ore Carriers for delivery in 2012 and 2013.

At the end of 2010, DryShips carried long-term debt of $2.15 billion and Ocean Freight had long-term debt of $132 million. DryShips will assume Ocean Freight’s debt as part of the deal and will also assume Ocean Freight’s existing credit facilities which include an aggregate debt limit of $142.8 million at Libor plus 250 basis points with a maturity date of October 2015.

DryShips isn’t the only shipper that is suffering. Shares in Eagle Bulk Shipping, Inc. (NASDAQ: EGLE) are down nearly -50% year to date, as are shares in Excel Maritime Carriers, Ltd. (NYSE: EXM). Shares in Genco Shipping and Trading Ltd. (NYSE: GNK) are off more than -50%.

None of these shippers has a price/book ratio above 0.5, and some are as low as 0.13. While numbers like this might often indicate a value play, in this case it very likely indicates a value trap. Shipping companies may turn around, but not this year and very probably not next year or the year after that either.

DryShips’ shares are down nearly -4.5% in early trading, to $3.66, barely within the 52-week range of $3.56-$6.44. A new low is very likely today.

DryShips clearly saw an opportunity to buy while there was blood on the ground. That some of the blood was its own didn’t stop them.

Paul Ausick

DryShips Inc. (NASDAQ: DRYS) is scheduled to report results tomorrow, and analysts are expecting EPS of $0.16 on revenue of $234 million. For the June quarter, expectations rise to EPS of $0.22 on revenue of nearly $279 million. Many other shippers have already reported quarterly results, including Genco Shipping & Trading Ltd. (NYSE: GNK), Diana Shipping Inc. (NYSE: DSX), Eagle Bulk Shipping, Inc. (NASDAQ: EGLE), and Excel Maritime Carriers, Ltd. (NYSE: EXM).

Charter rates remain low for both dry bulk and container shippers. The Baltic Dry Index, a measure of dry bulk shipping rates, currently sits at $1,344, about double its low of around $663, but still well below year-ago rates of nearly $4,000. Container shipping rates are rising somewhat, but by less than the industry would hope. From Shanghai to the Europe, the cost of shipping a twenty-foot container (teu) fell from $925 to $919. Rates had been as high as $1,300/teu earlier this year. Meanwhile, the cost of bunker fuel from Asia to Europe have risen to a record high of $776/teu.

Ironically, Diana Shipping was able to beat expectations for its first quarter by expanding the size of its fleet. The company’s average charter rate for the quarter was $31,592, compared with $31,982 in the same period a year ago. But the company averaged more than 2 more vessels in operation this year, making up for the lower rates and higher fuel costs. Genco, like Diana, also added new vessels in the first quarter, which helped the company overcome a 37% decline in shipping rates.

Eagle posted an EPS loss of -$0.09 for the first quarter, including a $6.6 million one-time loss. Excluding the item, the company posted EPS of $0.01 on revenue of about $87 million, which was up 60% compared with the same period a year ago. The company is expected to post an EPS loss of -$0.01 next quarter on revenue of $65.5 million, a sharp sequential decline from first quarter revenue of $86.7 million.

Excel posted an EPS loss of -$0.01 on a doubling of expenses. The company’s blended charter day rate was down by -20% year-over-year.

The number of dry bulk ships is expected to increase by at least 10% this year, while cargoes are expected to rise by only 5%. Add in higher fuel costs, and the outlook for shippers in 2011 is decidedly downbeat.

Paul Ausick

One type of shipper that could benefit fairly quickly is dry bulk, the massive carriers that haul coal, iron ore, and other raw materials. The carriers include DryShips, Inc. (NASDAQ: DRYS), Diana Shipping Inc. (NYSE: DSX), and Genco Shipping & Trade Ltd. (NYSE: GNK). The Baltic Dry Index, BDI, is recovering slightly from a very low 1,064. As coal is required in Japan to generate electricity no longer available from the damaged nuclear reactors, dry bulk rates from Australia and from the west coast of the US could rise. The rises will be limited by the amount of coal Japan requires and the amount that dry bulk terminals can handle. Terminals and coal shippers on the east coast of the US could also benefit as coal cargoes bound for Europe could be diverted to Japan and additional ships put into service.

Container shippers like A.P. Moeller Maersk (OTC: AMKBF), Danaos Corp.(NYSE: DAC), and Seaspan Corp. (NYSE: SSW) could see a slight slowdown in shipping until Japanese manufacturers get back to work. That process will probably be slower than anticipated.

Crude oil carriers like Frontline Ltd. (NYSE: FRO) and Nordic American Tanker Shipping Ltd. (NYSE: NAT) should see a pick-up as more crude cargoes are sent to Japan to help fuel electricity generation plants. Demand will be a function of how quickly Japan’s refineries can come back on-line, and the length of time the Japanese must depend on crude oil to fuel their generators. Another possibility is that refined products would need to be imported if re-opening the refineries is delayed for long.

Japan’s crude stocks stood at 169 days at the end of December 2010, according to Balkans.com. The country won’t want to run down its stocks and have to replenish them at higher crude prices, but by judiciously calling on its stocks, the country could mitigate some of the expenses from buying and shipping additional supplies of crude.

Liquefied natural gas (LNG) carriers include Teekay Corp. (NYSE: TK), Teekay LNG Partners, L.P. (NYSE: TGP), and Golar LNG Ltd. (NASDAQ: GLNG). Japan is already the world’s largest importer of LNG and it is reasonable to expect the country to receive more in the days ahead. In the longer term, it could be that Japan decides to replace at least some of its nuclear generation with gas-fired generation. But that decision is still months away in all likelihood.

The lightly traded Guggenheim Shipping ETF (NYSE: SEA) is up nearly 2% today, and Teekay LNG Partners and Golar are both up about the same amount. Most of the other shippers are trading slightly up as well, with only Dry Ships down slightly.

Paul Ausick

Earlier this month, Dryships Inc. (NASDAQ: DRYS) completed a private placement of shares worth a total of $500 million in its wholly-owned subsidiary Ocean Rig UDW Inc. The shares were newly-issued, unregistered shares priced at $17.50/share and amounted to about 20% of the Ocean Rig’s value. Dryships also plans to buy back up to $25 million of the Ocean Rig shares it just placed. On January 19th, Diana Containerships is expected to begin trading on the NASDAQ under the symbol ‘DCIX’.

Both Diana Shipping and Dryships are seeking a path out of the doldrums of dry bulk shipping, their main business. Dry bulk shipping rates have been soft all year, due primarily to an over-supply of ships. The Baltic Dry Index reached a 52-week low of around 1,700 in July, recovered to about 3,000 in September, and has fallen to below 1,900 again. For comparison, in May 2008, the Baltic Dry Index set an all-time high over 11,000. By December of that year, the index posted a low of 660.

In late November, analysts at Goldman Sachs said that the size of the dry bulk fleet would increase by 11% in 2011, while demand would increase by just 8.4%, according to report by Bloomberg. Dryships and Genco Shipping and Trading Ltd. (NYSE: GNK) were rated as ‘neutral’, and Diana Shipping was rated as a ‘buy’.

Diana Shipping and Dryships appeart to be following the same basic strategy — follow the money. And the money is in deepwater drilling and container shipping. Dryships already has two drilling ships at work and four more on order. Diana Shipping is raising capital for Diana Containerships without resorting to borrowing and further reducing Shipping’s exposure to the uncertainties of the container shipping markets.

In a separate deal, the Seattle-based shipping maintenance and repair outfit called Todd Shipyards Corp. (NYSE: TOD) has agreed to be acquired in a $130 million buyout valued at some $22.27 per share by Vigor Industrial LLC.

Dryships’ shares and Diana Shipping’s shares have so far hardly seen much action on the news.  Todd’s shares are up only about 7% at $22.45 after having been above $23.00 at the open.

Paul Ausick

Maersk Brokers have said that new dry carriers totalling 34.8 million deadweight tons, dwt, were delivered in the first half of 2010. Another 55 million dwt are on tap to be delivered by the end of the year. Maersk forecasts that 117 million dwt will be delivered in 2011.

The increase in tonnage increases competition for cargoes, and is almost certainly the cause for the dramatic drop in the BDI. Further evidence of the effect on new vessels is a report that three capesize ships, the largest in the dry bulk fleet, have been anchored in Singapore. When a large vessel is, essentially, mothballed, that means that shipping rates have fallen so far that it is no longer practical to keep a ship afloat. Capesize vessels are now being booked at $15,000/day, a price equal to the handysize carriers which displace less than 20% of capesize tonnage.

For a time, the falling BDI was thought to be connected to lower demand for commodities like iron ore. But iron ore shipments are currently stronger than ever. Seasonal demand from grain shippers helped hide the effects of the growing fleet size, which are just now becoming evident.

In a related development, demand for very large crude carriers, VLCCs, has also fallen. Day rates are down from $70,000/day to $10,000/day. VLCCs are capable of carrying up to 2 million barrels of crude, and as many as 74 ships were being used as floating storage for crude oil while the cargo owners wait for the price of crude to rise. Iran has recently released six VLCCs, with about 12 million barrels of oil, and sent the carriers to Europe.

New VLCCs are also being added a high rate, with 55-50 new tankers expected to be delivered by year-end. These deliveries are being offset somewhat as some 40 single-hulled tankers are removed from service.

The down market for VLCCs is expected to last through the rest of 2010.

DryShips and Genco are down about 30% since the beginning of the year, while Diana is off about 10%, although all are up slightly more than 1% in today’s trading.

The good news is that the collapse in the BDI probably does not indicate that the global economy is headed for the dreaded double dip. The not-so-good news is that the shipping companies are going to need an even bigger uptick in shipping than they’ve already gotten in order to soak up all the dry bulk capacity that’s coming.

Paul Ausick

Containerships are facing nearly the opposite problem — a jump in demand that is absorbing all but about 2.5% of available capacity even as new containerships are launched. From a peak of more than 240 ships available in March 2009, only 44 carrier-operated ships are now available. That’s good news for container shippers like A.P. Moeller Maersk (OTC: AMKBF), Danaos Corp. (NYSE:DAC), and Seaspan Corp. (NYSE:SSW). Dry bulk shippers Dryships Inc. (NASDAQ:DRYS), Genco Shipping & Trading Ltd. (NYSE:GNK), and Diana Shipping Inc. (NYSE:DSX) are stumbling.

Danish shipper Maersk, the world’s largest container shipper, today raised its 2010 earnings forecast, predicting that it would earn more than the $3.5 billion in profit it saw in 2008. In 2009, the company lost $1.31 billion. Maersk includes an accounting gain from a share sale in China, but excludes a $1.2 billion gain from sale of its Netto food stores to the UK division of retail giant Wal-Mart Stores Inc. (NYSE:WMT). Once the Netto sale is approved by UK regulators, it too will add to Maersk’s bottom line for 2010.

Where day rates for dry bulk vessels have fallen steadily, demand for container vessels is rebounding strongly from 2009 lows, both in volume and in rates. German container shipper TUI AG recently raised its outlook for 2010, and Taiwan’s Evergreen Group has ordered 10 new container ships.

Container shipping from Asia to Europe rose 21% year-over-year in May 2010. Shipments from Europe were down 6.3%. Traffic from Europe to North America 15.8% in May, good but nowhere near the 25.7% growth in April. From North America to Europe, traffic was up 13.2%, a bit short of the 14.8% growth in April.

Container ships carry mostly finished goods in those 20-foot boxes we’ve all grown so used to seeing. Dry bulk carriers haul mostly raw commodities like iron ore, coal, and petroleum. A slow-down in dry bulk shipping, reflected in the BDI, points to a slow down in base-level manufacturing of such things as steel. If steel manufacturing is falling (and it is), then demand for iron ore and coal will also fall as steel makers use up inventory and slow production.

On the other end of the manufacturing chain, products that use steel lag behind commodity pricing simply because it takes time to make the stuff. Container shippers are thriving now on orders to manufacturers that were made months ago, when the overall outlook for the global economy were much rosier than they are now.

If global GDP growth projections begin to soften, as they probably should, demand for goods will also weaken and container shippers may find themselves in the same position as the commodity shippers.

Container shippers and dry bulk shippers are trading about flat today, except for Genco, down about -2.5%, which has announced that it is selling 3 of 16 dry bulk vessels that it just bought and hasn’t even taken delivery of yet.

Paul Ausick

As shipping rates fall, dry bulk shippers like Dryships Inc. (NASDAQ:  DRYS), Genco Shipping & Trading Ltd. (NYSE: GNK), and Diana Shipping Inc. (NYSE: DSX) follow. All three shippers seem to be setting new 52-week lows every day. Two shippers more active in crude oil and refined products transportation are Frontline Ltd. (NYSE: FRO) and Teekay Corp. (NYSE: TK), both of which have seen share prices appreciate in the past year. The recently re-issued Claymore/Delta Global Shipping ETF (NYSE: SEA) is also trading near its 52-week high.

Daily rates for the largest vessels, called capesize, have fallen from $59,324 on June 2nd to $24,239 on June 30th. Even daily rates for the smaller vessels of panamax size have dropped from about $31,000 to $22,000.

The decline is mainly blamed on falling demand from China for commodities like coal and iron ore. As China tries to cool its economy, the country plans to cut its production of steel which has also been suffering from lower pricing.

A contributing factor to the falling shipping rates is the pace of growth in the supply of ships. One analyst estimates that the dry bulk shipping fleet will increase by 17% in 2010. Filling those ships with goods would not be a problem if the global economy were growing. Because the economy is growing only tepidly, freight rates will not rise, and may even continue falling. The average daily earnings from a capesize ship in 2010 is expected to fall from $41,000 in 2009 to $35,000 this year, and the outlook for 2011 is for more declines.

Another threat to shippers is the continuing piracy off the horn of Africa. Earlier this week, Somali pirates hijacked a Singaporean-flagged ship with a crew of 19 Chinese nationals. The ship, which is owned by a Chinese company, was carrying a chemical used in making anti-freeze and was on its way to India.

The Chinese government has already contributed ships to an international fleet that is patrolling the waters off the Somalia to keep that vital shipping lane open. Yesterday, China sent another flotilla of warships to the Gulf of Aden to relieve the country’s ships that are already there.

The increase in piracy raises the cost of insurance for ships travelling offshore of east Africa, and contributes to the shippers’ shrinking profits. But the big problem is lack of demand for shipping coal and iron ore. And unless demand for finished goods grows, demand for commodities will stay low.

The issues facing the shipping business mirror the issues facing the global economy. Demand is dying as buyers lose confidence in the economy’s ability to grow out of its current doldrums. As a result, unused capacity increases and people lose their jobs. Then the cycle repeats.

Dryships thought it had found a way out of the vicious commodity cycle when it bought a couple of drilling platforms and ordered four more to be newly built. But the disaster in the Gulf of Mexico has put a serious crimp in the company’s ability to lease its rigs. The original two rigs are under contract and manned by experienced Norwegian crews. However the company can’t contract for any of the new build rigs and lacks financing for two of them.

Dryships had originally intended to spin-off its drilling operations by the end of this year, but no one thinks that will happen now. Genco paid more than $500 million last week for 16 new supramax vessels, which is either a very smart move (buying at or near the bottom) or a very dumb one (adding to over-capacity and under-utilization).

Diana Shipping recently purchased two new container ships for about $45.5 million each. One is fully contracted for a year at $16,000/day, and the other, which will be delivered before the end of July, is not yet contracted. Again, a smart move or a dumb one?

Based on the dive these three stocks have taken since late April, investors seem to believe that none of the moves is positive. Until prospects for global economic growth brighten and begin to move steadily upward, commodity shippers are going to remain under intense pressure.

Paul Ausick

For the past 40 years, the price of iron ore has been set annually in a negotiated deal between miners and buyers. Typically, the first large customer to cut a deal with a miner set the precedent for all the rest. The deal fixed the price for iron ore for the following twelve months, completely ignoring changes in supply or demand.

Beginning this year, the three largest iron ore miners are changing the rules of the game, seeking to negotiate contracts quarterly instead of annually and taking into account spot prices that fluctuate more as supply and demand shift. The three miners that produce about two-thirds of the world’s supply of iron are Vale S.A. (VALE), BHP Billiton (BHP), and Rio Tinto (RTP).

Iron ore sold for about $68/metric ton in 2009, down from about $95/metric ton in 2008. That drop hit miners hard, and the uptick in the global economy which is increasing the demand for steel has given the miners the confidence to demand more for their iron ore.

Vale recently negotiated a contract with Japan’s Sumitomo Metal Industries that nearly doubles the price beginning on April 1st. BHP Billiton has not given any specifics, but has said that it has moved a “significant number” of customers to the new pricing scheme. The price for the quarter beginning April 1st could be as high as $120/metric ton.

The world’s largest buyer of iron ore is China, and the Chinese are not happy about the new regime. But Chinese steelmakers have bought iron ore on the spot market for the past year, and it is likely that the Chinese will eventually accept the new pricing scheme rather than buy on the spot market. For now, though, the Chinese are importing more iron ore from India, which is having some fallout in the shipping business.

India’s ports are too small to accommodate so-called capesize cargo ships, the largest on the world’s seas and the most popular with iron ore shippers. Shippers are required to move down in size to the panamax-size ships, which are smaller. Dayrates for panamax class ships have now risen above dayrates for the bigger capesize ships, a phenomenon last seen at the end of 2008 when the global financial system appeared to be on the verge of total collapse.

This change in ship size will affect dry-bulk carriers like Genco Shipping & Trading (GNK), Diana Shipping (DSX), DryShips (DRYS), and others which haul a lot of iron ore. Shipping analysts believe that the fixed-price contract for iron ore is better for the shipping industry, but they seem reconciled to the fact that spot pricing is the new way.

That doesn’t mean they, or any other business downstream of the miners likes the deal. Aside from the Chinese, the Europeans are yelling the loudest about the change. Steelmakers and automakers in Europe are demanding that EU regulators investigate what the automakers have called “distortive developments” resulting from the new iron ore pricing scheme.

The argument that the miners are engaging in unfair trade practices is a bit disingenuous. When the benchmarking contracts that favored steelmakers were the standard, the miners didn’t charge the steelmakers with collusion.

And the ripples don’t stop there. The spot market for iron ore is just barely in development, and, therefore, barely liquid. The derivatives market for iron ore swaps is currently estimated to cover about 36 million metric tons of production, about 4% of total global production. Contrast that with the market for crude oil, where derivative contracts exceed physical product by anywhere from 3 to 10 times. Steel producers have very little experience in these markets and there will be some rocky reefs ahead.

The big winners, for now, appears to be Cliffs Natural Resources (CLF) and, oddly enough, the US steel industry. Cliffs is the last of the major North American iron ore miners and it has seen its share price rise almost 60% since the beginning of 2010.

Because the ore price hikes affect only seaborne cargoes, US steelmakers US Steel (X), Nucor (NUE), AK Steel (AKS), and ArcelorMittal (MT) are largely able to avoid the price rises because they either own their own iron ore mines or they can buy from Cliffs.

The battle over iron ore pricing is not over yet. But for now, the miners have the advantage.

Paul Ausick

Over half of the dry shipping stocks in the Tickerspy index has risen over 100% off of their 52-week lows.  The industry was placed in serious jeopardy as global trade entered a state of decline during the credit crunch.  Shipping rates fell dramatically as recently as this summer, but have been on the rise in recent months.

Garrett W. McIntyre