Investor's Business Daily, July 17th, 2007
More than 815,000 vessels have passed through the Panama Canal since it opened in 1914. It has influenced world trade routes and spurred global growth.
The canal has also created a class of dry bulk vessels called Panamaxes. It's named after the famous passage because it is the largest possible ship that can fit through the canal's locks. It can carry about 75,000 deadweight tons (dwt).
Diana Shipping is the 10th largest Panamax owner in the world. But what it lacks in size, it makes up in quality and youth.
Diana DSX is a global provider of shipping transportation services. The company specializes in moving dry bulk cargoes, such as iron ore, coal, grain and other materials, along worldwide shipping routes.
Its strategy is to own and operate a young fleet of dry bulk ships in the two largest classes in the sector, Panamax and Capesize. There are 720 Capesize ships and 1,415 Panamax vessels afloat today.
As of November 2007, Diana's fleet will consist of 13 Panamax vessels, four Capesize vessels with two more Capesizes on order for delivery in early 2010. Once the two new ships arrive, its carrying capacity will be 1.8 million dwt.
A Capesize is the largest dry bulk cargo ship available. It can carry an average of 150,000 dwt and is too big to travel through the Suez Canal and the Panama Canal. Instead, it must travel routes around the Cape of Good Hope (Africa) and Cape Horn (South America).
The average age of Diana's fleet is 3.2 years. More than 35% of its rivals' fleets in the dry bulk segment are 20 years old or more.
Upper echelon customers prefer vessels 20 years old or less. This is for a simple reason: Quality vessels ensure that the cargo is delivered as expected, said analyst Urs Dur of Lazard Capital Markets.
"Our fleet is one of the youngest in the dry bulk sector," said founder and CEO Simeon Palios in a conference call in May. "We have taken advantage of market conditions to secure long-term contracts that provide good earnings visibility for the next three to four years."
Earnings
Diana's first-quarter earnings soared 54% to 40 cents a share. Analysts polled by Thomson Financial expected 41 cents.
Palios said the company will have eight vessels under charters running through 2009 or beyond. Roughly 44% of its fleet capacity is committed to long-term contracts.
While certain dry bulk shipments have helped drive demand, growth for Diana is based on the supply of ships on hand, Dur said.
"If iron ore prices are through the roof, but there is an oversupply of ships, prices to ship the cargo are going to be lower," he said. "But right now, there are too few ships to move all the dry bulk cargo. This hikes up the shipping costs. And that is good for Diana."
Dur projects that demand for dry bulk shipping will exceed the supply of ships through 2010. Diana's fleet has nearly full contract coverage for the rest of this year. It has secured 35% of its operating days under contract for next year.
The company said there are a lot of dry bulk goods driving the demand for its services. But steel is one of the most sought-after products to ship right now.
"When we consider the main drivers of demand for dry bulk shipping, steel production features at the top of the list," said president Anastassis Margaronis during the same conference call in May.
Howe Robinson, a shipping analyst firm, found that last year's crude steel output rose by 105 million metric tons to 1.2 billion metric tons, a 9% increase over 2005.
Research firm Maersk said in the first three months of this year crude steel production hit 318 million metric tons, up 10% from a year ago.
The rising demand for steel is linked to the growth of industrial production in China, India, the U.S., Europe and Japan. The demand for steel has helped the IBD Transportation-Shipping group grow 581% since September 2002.
Coking coal and iron ore, both dry bulk goods, are needed to make steel. China is the world's largest importer of both materials. It imports 30% of the world's iron ore and 25% of the coking coal.
The Chinese steel industry makes up 34% of global production. China is at record levels and its need for more iron ore is on the rise.
"A reduction in the quantity of Indian iron ore reflects Chinese importers' reluctance to pay for the higher Indian duties and its preference to pay for the longer haul ore from Brazil as a substitute," Margaronis said in the call.
And the longer hauls will cost customers in China. The day rate for a Capesize vessel for a period of five years is $52,000 to $55,000, Palios said.
Rates for a Panamax vessel hit a three-year high when it reached more than $55,000 a day, said analyst Douglas Mavrinac of Jefferies & Co.
"Dry bulk charter rates should remain strong throughout the rest of the year," he said, "especially as the supply of new ships reaching the market begins to slow."
Mavrinac cited strong demand for iron ore and coal in places like China, where energy demand is surging. He also noted the need for grain in North America as well as rail capacity shortages that should prove beneficial for shippers.
Dividends Forthcoming
When Diana pays off its debt, management intends to pay out dividends that equal the cash available from operations during the prior quarter. It takes into account costs, repairs and capital needed to support its operations when calculating the cash dividend.
It paid a dividend of 50 cents a share in the first quarter. Its 2007 dividend payout will be at least $2 a share, while next year is expected to payout $2.04 a share, Dur said.
"Even assuming no fleet growth, we think Diana's annual dividend payout will be at least $2 a share," he said. "That's a 9.1% yield at the current share price through 2008 and 2009."
The dry bulk shipping sector is highly fragmented. The top 10 owners of Capesize tonnage own 34% of the fleet. The top 10 owners of Panamax tonnage control just 20% of the fleet. The rest of the market is made up of small, private owners that have small fleets.
These conditions, coupled with Diana's balance sheet, make the company a potential consolidator, Mavrinac said.
"There will be opportunities for Diana to make acquisitions in the private market, where the prices of the assets are still attractive," he said. "And it will have the funds to make them."
