J. P. Morgan Securities analyst Jonathan Chappell says tight supply-and-demand dynamics could mean that day rates for the first quarter "will be very strong and that 2008 will be a little better than 2007, which was a record year."
Beyond these next 12 months, Chappell is cautious because of a surge of new ship deliveries. Dry-bulk-shipping capacity will increase by 78% in 2009 and another 53% in 2010, he says.
But even with new capacity coming to the market Hanlon of Delta Global Advisors says doomsayers overlook the outmoded ships due for retirement. "We are dealing with a very aging fleet�that is only being kept past normal life because of how high rates are." A third of it is aged 25 years or more, and more than half of the fleet is 20 years old.
So unless there is a recession, Hanlon says the fear over the pipeline of dry-bulk ships being built is more "legitimate three years from now"
Consolidation in the fragmented industry could help offset some of the pricing pressure created by new ships sailing into the market. Today, the top 10 dry-bulk companies control about 17%-18% of total shipping capacity, notes Genco CFO Wobensmith.
Genco and Diana have been savvy about acquiring vessels at good prices. Each company is well managed by longtime players in the shipping industry. Genco Chairman Peter Georgiopoulos is a self-made shipping mogul. Diana is captained by Simeon P. Palios, who founded the company in 1972.
Their business models are the exact opposite, Chappell says.
Diana pays out its entire free cash flow to shareholders through dividends. It funds acquisitions by issuing new stock at prices at a premium to the net asset value of the ships it is acquiring. Genco, meanwhile, uses debt to make acquisitions and has a 50%-60% debt-to-capital ratio.
Of the two, Bear Stearns' Burk sees higher potential upside for Genco in part because of two new profit-sharing charters with Cargill, a closely held agricultural and risk-management company.
For example, one of the vessels was locked into a charter with Cargill for four years with a base day rate of $45,000 a day, says Genco's Wobensmith. Cargill will pay Genco 50% of the difference between this rate and the spot market rate for that type of vessel. (Day rates are paid every 15 days.)
"It is an elegant way to slice the profits between the owner and the charters," says Burk.
Certainly, concern about the global economy could continue to create squalls for the dry-bulk-shipping industry.
But the combination of attractive valuations, high dividend yields and new charters should mean smooth seas for Diana and Genco.