Genco Shipping (New York Stock Exchange NYSE: GNK) owns 53 dry bulk vessels, ships used to transport non-liquid goods such as grain or coal. The company has grown at a breakneck pace. Genco's ships, which have a total shipping capacity of approximately 3,812,000 deadweight tons (dwt),move mostly iron ore, coal, grain, and steel products. Genco charters its ships for periods of one to four years, and so only assists other companies in moving those goods. As Genco charters its ships for movement along major international shipping routes, it exposes itself to competition from the 1,300 or so other dry bulk vessel shipping companies and owners operating in the world.
The health of the dry bulk shipping industry, and all companies within it, are tied to the health of China's economy. With China on the rise, shipping rates have been skyrocketing. Unfortunately, a surge in new shipbuilding is raising demand for ship maintenance and repair services, as well as moderating potentially high charter rates. Worse yet, that surge is going to continue for at least the next couple of years. Ironically, while high demand for steel products has pushed up charter rates, it has also made new shipbuilding more expensive.
Genco Shipping buys used but young vessels, and then contracts them out to customers for periods of one to four years for a fixed daily fee.
Unlike many of its competitors, which focus on building up a fleet of just one or two ship types, Genco evaluates a ship on its value in and of itself, not on its type. Each ship is capable of carrying a different amount of cargo, with a Capesize vessel capable of moving six times as much cargo as a Handysize vessel. Being larger is not always better, however. A large ship like the Capesize can only be accommodated by the largest deep water terminals, while a Handysize vessel can access nearly all ports. Therefore, although rates for dry bulk ships tend to move together, they do vary by vessel type. Having a diversified fleet lets Genco minimize volatility in its revenues.
Genco has also made the choice, which it may later change, to make time charters rather than running its ships on the spot market. On the spot market, a company can contract out its ship for a single voyage based on current charter rates on the Baltic Dry Index (BDI). The BDI is a daily average of the prices required by shipping companies on the Baltic Exchange to transport raw materials across the sea. The Baltic Exchange is a global marketplace for brokering dry cargo shipping contracts. Long term contracts avoid the risks, but also the potential profits to be made on the spot market. In a time charter, Genco loans its ships to another company for a fixed daily fee. Genco is responsible for managing the ship and its crew during that time, but has no control over how its ship is used, aside from terms set in the charter contract. Genco does not manage its ships directly, preferring to contract technical managers from companies in the business of taking care of the day to day activities of dry cargo vessels.
In 2009, GNK generated a net income of $148.6 million on $379.5 million in total revenues. This represents a 71.7% increase in net income on a 6.4% decrease in total revenues from 2008, when the company earned $86.6 million on total revenues of $405.4 million.
GNK operates through one reportable business segment which transports drybulk cargo with its fleet. The company does not provide geographic breakdown of its revenues because doing so is impractical when shipping through international waters.
Strong growth in Asia, mostly in China, has caused demand for raw materials to skyrocket. Unable to extract the necessary resources domestically, China has turned to imports from other countries. Because Genco's fleet is diversified, the company avoided being dragged down by negative growth in the Handysize market, in which it owns 8 ships, but also avoided being propelled by strong growth in the Supramax and Panamax markets, in which it has 9 ships.
Rising Chinese demand for iron ore has pushed up dry bulk shipping rates.This means that shipbuilding costs have been increasing, making future ship expansion more expensive. Some of that rise will be absorbed by shipbuilders, and some of it won’t. The problem is that future fleet expansion is becoming less and less attractive. Within 3 years the size of the worldwide fleet will be at least one and half times what it is now. Even if China continues its rapid rate of expansion, over the past 3 years it grew just 36%, not 50%.
Competition in the dry bulk shipping industry is based primarily on three things: price, vessel type, and vessel age. Price wise Genco has little control, only being able to choose when and for how long to make a contract. Genco's fleet is young, with an average age of just 6.37 years, and well diversified, with almost every type of ship from the baby Handysize to the gargantuan Capesize. Unlike its competitors that run on the spot market, Genco passes port, canal, and fuel costs onto its customers.
Genco competes with companies like: