The spot charter market and the time charter market
The two main markets for shipping companies like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), and Safe Bulkers Inc. (SB) are spot (voyage) and time charter (period). Companies that engage in the spot market will charge a one-time fee that customers pay to have a certain amount of goods shipped from one destination to another. On the other hand, companies in the time charter market will contract ships and operational services out for a specific period, usually one to two years, at a negotiated daily rate.
Double-edged sword contracts
Using data extracted from dry bulk shipping companies’ latest annual reports, analysts compared the value of each firm’s contracts to the current time charter equivalent rates for the spot and time charter markets. The model also takes into account contract maturity dates to reflect how future revenues will be affected. As of July 2, Safe Bulkers Inc. (SB) held the most valuable set of time charter contracts: time charter premiums make up ~35% of the company’s total shipping revenue.
In a supply-driven market with excess capacity, companies in time charter markets tend to outperform those in spot markets because of lagging shipping rates. Firms that have longer-term contracts are able to shield themselves from declining industry fundamentals and falling shipping rates until contracts expire. However, when contracts expire, shipping companies have to renegotiate prices at a lower rate, lowering revenues, earnings, and free cash flows. So it’s important for investors to understand each dry bulk shipping company’s time charter contracts’ maturity dates and negotiated rates.
Unfavorable outlook to be discussed at earnings
As early as July 2014, several companies will have to recontract their ships out at lower rates. Although this won’t influence companies’ second quarter earnings, which will be released in July and August, the lower rates may negatively affect management’s discussion of companies’ future outlook—affecting their share prices as well. Based on current 12-month time charter rates provided by RS Platou (an international ship and off-shore broker company), updated monthly, the dry bulk shipping revenues of Safe Bulkers Inc. (SB), Navios Maritime Partners LP (NMM), and DryShips Inc. (DRYS) could drop as much as 6%, 5%, and 10%, respectively, if rates stay the same during the third quarter. Since the shipping industry incurs mostly fixed costs, earnings will move by a larger amount. If rates don’t recover as we approach the end of this year, Safe Bulkers Inc. (SB) may experience further downside of more than 10% in revenue during the fourth quarter.
Investors should review other driver analysis to get a better understanding of the drivers that are currently affecting the dry bulk shipping industry. While maturing contracts is a negative driver, there are positive drivers. Some must-reads include Low inflation supports availability of monetary stimulus, positive for shipping stocks, China’s interbank lending rate falls below 6.0%, positive for dry bulk shipping?, Managers continue to order ships, long-term supply and demand balance favorable, and Soaring housing prices are actually positive for China’s real estate and dry bulk stocks.