Dry Bulk 2011: Working Through the Glut

NEW YORK ( TheStreet) -- The volatility has dried up. The trading volumes have plunged. The money has fled.

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A fleet of formerly high-beta dry-bulk shipping stocks have entered the doldrums. From DryShips ( DRYS) to Excel Maritime ( EXM) to Eagle Bulk Shipping ( EGLE) to Genco Shipping & Trading ( GNK), maritime transporters of dry cargoes such as iron ore, coal and grain have seen investors decamp from the sector over the last year, even as demand and prices for those commodities have themselves surged.

The irony is not lost on those involved in the trade.

"Nobody cares about shipping," says one hedge-fund manager, dejectedly. A native of Greece, he specializes in trading maritime equities. "It's like a forgotten industry. Nobody wants to touch it. It's actually kind of worrisome."

It's easy to see why. For two years now, industry observers have been sounding the alarms and raising the semaphores about a coming glut of new vessels. Back in the boom times of 2007 and 2008, ship owners were flush with cash as demand for raw materials exploded (especially from China). Borrowing costs, meanwhile, fell to historic lows. And, seduced once again by all that easy money, shipping executives behaved like U.S. homebuyers and binged at the shipyard, ordering thousands of new ships. It's an ancient story -- the cycle of the shipping industry. "Owners always do this," says Jeffrey Landsberg, who runs the dry-bulk analytics shop Commodore Research, in New York.

The craze was especially vigorous among Capesize vessels, the largest dry bulkers on the high seas, more than 1,000 feet long and so big they can't fit through the canals of Suez and Panama and must therefore circumnavigate the famous southern capes of Africa and South America (Good Hope and Horn, respectively).

That's because "Capes" (as they're called by insiders), are the hauler of choice for iron ore, and -- in good times at least -- service the most lucrative cargoes and routes, because they're responsible for feeding China's dynamically growing steelmaking industry.

But even Chinese demand hasn't been able to absorb all the cargo space ordered up by ship owners with dollar signs in their eyes back in 2008.

By almost all accounts, the glut has arrived. Last year, about 210 new Capes were delivered. By comparison, 115 emerged from shipyards in 2009. In the several years before that, the annual number of new Capes came to between 40 and 60. Since 2009, the global Capesize fleet has grown by 18%.

The rates at which iron-ore miners hire out Capesize ships slowly eased lower throughout 2010, a decline that sharpened in the final months of the year, moving from about $40,000 per day in early November to $20,000 as of Jan. 3.

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