Diana Shipping Inc. (NYSE:DSX) owns and operates 18 dry bulk shipping vessels with a capacity of over 2 million deadweight tons. Diana's fleet is one of the newest in the world, being over nine years younger than the average merchant fleet. The company earns its revenues by chartering its vessels to other companies for periods of two to five years for a fixed daily fee. The chartering of these vessels involves the delivery of commodities like iron ore and wheat throughout the world. From 2006 to the middle of 2008, shipping rates have exploded, causing Diana's net income to rise over 120% from 2006 to 2007. Unfortunately for the company, the 2008 Financial Crisis and the ensuing global economic downturn has caused rates to change directions - prices to ship dry good fell 90% in the period from June to October 2008, falling to 2002 levels.
Slowing growth in China since Q2 2008 has damped demand for raw materials. Smaller demand for raw materials means there's less demand for manufactured goods, both of which mean there's fewer things that need to be transported to and from China. Nearly all of Diana's contracts were negotiated before the fall, but by mid 2009 half of them will have expired and come up for renegotiation, at which time the company's margins are going to be in trouble. Compared to its U.S. competitors, Diana has been growing slowly, focusing on replacing old ships with new ones, rather than just buying up more vessels. That strategy is soon going to become prohibitively expensive as steel prices continue their rapid ascent. Worse yet, shipyards are running a 3 year backlog. Once that backlog clears, the number of dry bulk vessels in operation will have risen approximately 50%. That's a lot more competition for Diana to face.
Diana Shipping has been growing rapidly, in part because the industry as a whole has been expanding, but also because Diana has been able to raise large amounts of capital through frequent equity offerings. From 2006 to 2007, Diana's revenues grew 39%, and its net income rose 120%. Diana buys new or used but young vessels, and then contracts them out to customers for periods of two to five years for a fixed daily fee.
Unlike its younger peers Genco Shipping (GNK) & Eagle Bulk Shipping (EGLE), Diana has followed a conservative approach to expanding its business based on the goal of maintaining a low level of debt. During the dry bulk shipping boom from 2005-2007, enough financing was available for Genco and Eagle to double the size of their fleets. Diana used only a portion of that financing, missing out on the opportunity to expand rapidly, but ensuring that its level of debt was the lowest of its major competitors.
|Market Cap (10/28)||Net Debt||Debt/Equity||Return On Assets||Return On Equity|
|Excel Maritime Carriers||$398M||$606M||1.48||6.26%||12.06%|
Faced with more than doubled net income and rosy prospects for the future in 2007, Diana purchased 4 capesize vessels, which are the largest class of dry bulk vessels, and nearly doubled its shipping capacity. With the industry now in decline, that decision would have been costly, but Diana negotiated long term time charters for its vessels before shipping rates began to fall. In these charters, Diana provides a customer with the use of its ship for a fixed daily fee for a preset length of time. As of Q2 2008, the average charter made by Diana will expire and come up for renegotiation in 2010.
|Number of Vessels||7||12||15||18|
|Shipping Capacity In Deadweight Tons||523,000||816,000||1,137,000||2,003,000|
The Baltic Dry Index (BDI) is an average of spot market prices for various sizes and routes of shipping dry goods. On the spot market, a company can contract out its ship for a single voyage based on current charter rates. Although only 3 of Diana's ships are continuously chartered on the spot market, long term time charter rates are based on current and expected spot market rates, which have fallen over 90% since their peak in May. The decline is apparent in Diana's falling charter rates. For ships with multiple contracts, those made for 2011 pay on average 26% less than those made for 2009. As Diana's other charters expire and come up for renegotiation, rates will be falling. The fall in the BDI is mostly based on three factors: an anticipated oversupply of vessels, weakening demand for raw materials from China, and a faltering financial system in the west.
The largest driver behind the BDI's meteoric rise in 2007 was China's ravenous appetite for raw materials.For example, china's annual copper imports have been growing 10 times faster than the copper imports of the rest of the world for the past 4 years, accounting for 67.9% of the growth in demand for copper in 2007. The supply of dry bulk vessels hasn't been able to keep up, pushing up shipping rates. The average daily rate charged by Diana for the use of one of its ships has risen 144% from 2003 to 2007. Unfortunately, uncertainty clouds the future.
The ongoing financial crisis in the United States has spread across the globe, albeit in a weaker form in countries like China. Excluding petroleum, the U.S. monthly trade deficit shrank to an 8-year low in August. Exports fell 2%, and imports fell 2.4%, their largest drops since 2004. Weak demand for imports in the U.S. and countries like it lowers shipping volume directly, but also hurts the economy of manufacturers like China, reducing their demand for raw materials and further lowering shipping volume. That is why the BDI has fallen to 2005 and 2006 levels.
In 2007, there were contract orders for the construction of enough ships to increase the size of the worldwide fleet of dry bulk vessels by 57% within the next 3 years, excluding ship retirements. Until last month there was disagreement in the industry over whether demand would keep pace. Now, with world economic growth slowing down, there is little doubt that if all new shipbuilding orders were completed there would be an oversupply. However, according to Pacific Basin Shipping Limited, a dry bulk shipper, shipyards won’t be able to complete all of their orders on time. Furthermore, many dry bulk shipping companies make orders or purchase options to buy new ships with the expectation that they will be able to find financing later. They will be able to find financing, but its going to be much more expensive than it was a couple years ago. Every day that the cash squeeze continues lowers the likelihood of an oversupply developing. Although the BDI has fallen over 70% in the past 5 months, rates are still high enough to keep operating margins healthy - for now.
From April 2007 to April 2008, steel prices rose more than 35%. Prices for steel plates, which are used to build ships, have risen by up to 83% during that same time period. Some of that rise will be absorbed by shipbuilders, and some of it won’t. In addition, their is a 3 year backlog in new shipbuilding orders. That puts a premium on ships available for construction anytime before 2011. Coupled with the fall in the Baltic Dry Index, its unlikely that Diana will continue its rapid pace of expansion (relative to in the past, not to other companies). There is an upside, however. From 2004 to 2007, the per ship value of its fleet rose 189%, from $16.7M to $48.2M. From the end of 2007 to Q2 2008, Diana's fleet has managed to maintain its value.
With China's economy slowing down, demand for steel has been falling. In response, steel producers have been cutting production. Nevertheless, steel prices fell for the first time in 22 months in September, albeit by only 9%.
In 2007 49% of Diana's revenues came from just 3 customers. The loss of any of those customers would require Diana to find a replacement. Were Diana to be informed ahead of time that one of its customers would have trouble meeting its contractual obligations this would be a non-issue. The problem is that sudden loss of one of these customers would leave a number of Diana's ships idling. The company could then charter these ships on the spot market, where prices fluctuate greatly from week to week, or hastily arrange a time charter with less than favorable terms. The fortunes of two of these three customers, Australian Wheat Board (AWB-ASX) and Cargill, are based on wheat prices. Were wheat prices to suddenly decline, their business, which is based in part on buying and selling large quantities of wheat, would no longer be as successful. They would then have a diminished ability to pay off their daily charter fees for Diana's ships.
Diana Shipping has the youngest fleet out of its major competition listed on the NYSE. On a global scale Diana also fares well - the average dry bulk vessel was 13 years in 2005, while the average age of Diana's ships by weight was 3.4 years in 2007. A young fleet is less expensive to maintain, is equipped with more fuel efficient engines, is safer, will get better cargo insurance rates, and is more attractive to potential customers. However, acquiring a young fleet is expensive, especially given the current climate of tight credit and rising shipbuilding costs.
|Competitor Data||Revenue||Net Income||Shipping Capacity in Deadweight Tons||Average Age of Fleet (Years)|
|Diana Shipping (DSX)||$190M||$134M||2.3M||3.4|
|Eagle Bulk Shipping (EGLE)||$125M||$52.M||2.9M||6|
|Genco Shipping (GNK)||$185M||$107M||3.5M||6.37|
|Navios Maritime Holdings||$206M||$21.1M||2.9M||4.5|