Best In Class: Diana Shipping, Part 2

This is the second installment in today's two-part series on Diana Shipping. Click here to read Part One.

Diana Shipping(DSX Quote) president Anastassis "Stacey" Margaronis conducted a series of sit-downs in New York during last week's shipping-industry conference. Meeting one-on-one with some 25 institutional investors, he gave them all the same lecture, he said, in an effort to explain Diana's bearishness. (It was almost an anti-sales pitch, except it wasn't; with such candor, the company most likely hopes to win over investors.)

The problem, Margaronis said, is that many people have interpreted the collapse late last year, when shipping rates plunged by some 90% from their all-time highs in May 2008, as the bottom of the natural shipping cycle, which ebbs and flows based on supply and demand -- on dynamics, in other words, internal to the dry bulk industry.

It's an old and familiar story: When demand for shipping is high, ship owners strive to take advantage by ordering whole fleets of "newbuildings," as they say in the industry. But after the Champagne bottles are smashed over all those bowsprits, and the new boats slide into service, a glut forms, crashing shipping rates and the value of the freighters themselves. This is the natural shipping cycle, helped along, of course, by the expansion and retraction of the world economy as a whole.

But, according to Diana, last year's collapse in rates resulted from a set of vicious extraneous factors: namely, the most severe credit crunch since the Great Depression. Banks refused to issue credit not only to shippers but the traders who are instrumental in paying for the transport of raw materials between producer and manufacturer. In the case of dry bulk, that mainly means iron ore from Australia and Brazil on its way to the steel foundries of China. (To a large degree the dry-bulk hauling business depends, like modern commerce itself, increasingly, on China.)

The surprise jump in rates in the spring, as measured by the Baltic Dry Index, developed because the Chinese were stockpiling cheap commodities, Diana and many others have argued. This perhaps artificial boost in demand added to the sense that business had in fact plummeted to its bottom before marching straight back up into a nascent recovery.