The dry bulk shipping industry was washed ashore on Tuesday as freight rates on the largest vessels dropped for the first time in months and squeamish investors pulled out.
Freight rates on cape size ships, which are the largest vessels, dropped unexpectedly on Tuesday, which some analysts say may be a, causing shipping prices to decrease as less vessels are needed. Others said that Chinese steel producers are downplaying the demand for steel by holding off on chartering ships in order to rattle the shipping industry since a decrease in demand for steel would mean a drop in shipping prices.
The last 12 months have seen enormous gains in the shipping industry as steel production and demand for raw materials in China has soared. As more ferry loads of coal, steel, grains and other commodities have been chartered it has caused upward pressure on shipping costs. That's good news for the dry bulk shipping industry, which has seen even its worst stocks skyrocket as much as 150% in the last year.
But the Chinese steel industry can"t be too happy. Iron ore makes up about 25% of the bulk commodities transported in cape size ships, the largest vessels. The Chinese went from 8% of the global steel production to 35% in the last year, said Charles Rupinski, senior equity analyst at Maxim Group.
Rupinski said that it now costs more to ship iron ore than the ore itself is worth, given the high rates for larger vessels and the long distances needed to bring the ore from Brazil to China. In addition, shipping rates are way up because there aren't a sufficient number of ships to keep up with demand. ¡°There's been a lot of talk from Chinese steel officials that they're not happy with the rates for iron ore,¡± Rupinski said.
News that shipping rates decreased, combined with the fact that Chinese steel officials made their displeasure with shipping prices known, scared investors who have been waiting for the ball to drop on the dry bulk shipping sector for some time.
DryShips (NASDAQ: DRYS - news - people) shares slid 17.5%, or $22.97, to $108.00 at the close. DryShips shares soared from $13.85 on Oct. 31, 2006 to $130.97 at the close on Oct. 29, 2007, before an article entitled World's Scariest Stocks: DryShips was published on The Motley Fool on Monday, spooking investors. The site questioned DryShips" profitably. As investors started selling DryShips it sent waves through the market causing all the dry bulk shippers to tumble. Investors didn't even heed Jim Cramer's advice to buy Diana Shipping, (nyse: DSX - news - people) which was one of his picks on CNBC's Stop Trading!
Investors in the dry bulk shipping sector drowned as stock prices plummeted. Excel Maritime Carriers (nyse: EXM - news - people) plunged 20,0%, or $16.00, to $63.91 at the close, while Diana Shipping (nyse: DSX - news - people ) tumbled 12.6%, or $5.63, to $39.19. FreeSeas (NASDAQ: FREE - news - people) dropped 10.8%, or 97 cents, to $7.99 and Quintana Maritime (NASDAQ: QMAR - news - people) slipped 5.7%, or $1.64, to $26.93.
Natasha Boyden, an analyst at Cantor Fitzgerald, said she sees absolutely no change in the fundamentals in the dry bulk shipping sector. Boyden says the decrease in stock price should be seen as a buying opportunity.
Rupinksi agreed. He said the earnings power of these companies will continue to grow even at the current levels.
