Shipping ETF Navigates Rough Seas
Investors should hold off on dry-bulk shipping for now, and wait to add the Claymore/Delta Global Shipping Index ETFs(SEA) to their portfolios until later this year.
SEA tracks a cross-section of bulk and tanker ships, and shipping has struggled across the board.
Included among SEA’s holdings are dry bulkers who will report later this month: Genco Shipping & Trading(GNK), DryShips(DRYS), Diana Shipping(DSX), Excel Maritime Carriers(EXM) and Navios Maritime(NM).
While dry bulk ship companies like GNK and DSX continue to see improvement, rates are still a far cry from peak levels. For example, GNK recently announced a one-year contract for one of its large capsize vessels — the Genco Agustus. The rate for the contract is $39,000/day compared to the $100,000-plus this ship would have gotten in the hay days of 2008.
DSX recently booked two of its panamax ships on two-year deals at $21,000/ day, far off the highs in 2008. As firms like GNK and DSX slowly creep back toward profitability when rates stabilize, investors are better off avoiding SEA in the short term.
A bevy of new dryships are expected to hit the market later this year, and it’s tough to judge the impact that such an influx will have in a shaky global recovery. While this boom-and-bust industry does a good job of self-regulating over time, a short-term glut seems inevitable.
Since drybulk shippers transport both raw goods like grain as well as finished goods in containers, some ships will be easier to move in an economic downturn. While demand for grain will continue, some consumers will hold off on buying a new pair of sneakers.
The brute forces of supply and demand will shape the immediate future of the shipping industry. As new ships enter the market and old ships are scrapped, an equilibrium will be reached eventually.
By the end of 2010, when most of the new ships will have hit the market, SEA could shine as a solid holding for the long-haul.
In the meantime, ETF investors can isolate the profitable shipping products, rather than buying SEA. Demand for raw goods and energy in China should continue to help ETFs like Market Vectors Steel(SLX) and Market Vectors Coal(KOL). These products will continue to be needed, and they will arrive by ship.
