The Baltic Dry Index has been hammered so far in 2016 as the "short China" trade has carried over to boats that carry iron ore and coal. The BDI is falling through 30-year lows and people are freaking out. There are seasonal factors at play here, as the market always slows in the winter and ahead of the Golden Week/New Year holiday in China (which starts Feb. 7). It tends to recover after the holiday.
What's even more striking, though, is the differentiation among the three main classes of ship. Based on the afternoon fixings reported at London's Baltic Exchange, the latest spot charter rates were:
Capesize, $3101
Panamax, $3188
Supramax, $4308
Those rates don't at all reflect the cargo capacity of the different ship sizes. The average Capesize holds about 170,000 deadweight tons, while Panamaxes hold about 70,000 and Supramaxes hold about 55,000.
So it costs nearly 40% more to hire a boat that holds 67% less cargo.
How can that possibly be?
Welcome to the wild and woolly world of dry bulk. I have never seen a market so full of dislocations and inefficiencies. So now, in this seasonally weak time of year, period charters are commanding two to three times the price of spot charters. It's a level of contango that makes current pricing of oil futures seem rational and, ultimately, it is an indication that ship charterers believe the supply/demand balance will improve.
The sharks -- the bond market vigilantes -- are circling around the dry bulk shipping industry and, as the largest public player, Navios Maritime Holdings (NM) has been targeted.
Moody's downgraded Navios' credit rating Tuesday, although it did keep the outlook at stable and noted that Navios' next big debt repayment isn't until 2019. Moody's note is balanced (sign-in required), and focuses mainly on Navios' exposure to very low commodity shipping prices.
But it's just a question of repricing risk, and with Navios Maritime Holdings' preferreds trading at 16 cents on the dollar today, I believe the market is overestimating the default risk at Navios. Remember, Navios Maritime Holdings survived 2009, while so many competitors didn't. The same management team is navigating through this current, bleak environment.
The key is the word "Holdings." Navios has created a number of entities that own various assets, including ships in the container industry -- where rates are down but not depressed like they are for dry bulk -- and the Holy Grail of shipping right now, oil tankers. It's a little complicated (read the Moody's note for an explanation) but the key is that Navios gets a dividend stream from these other entities. It's a great time to be shipping oil, and while Navios Holdings doesn't own any tankers, Navios Maritime Midstream Partners (NAP) and Navios Europe do, and the benefits of that ownership flow through to Navios Holdings.
It's not a simple structure, but it's what's going to allow Navios to survive while other competitors likely fail.
Navios has eliminated its common dividend, and with most of its ships mortgaged through ship finance notes, I would look for the company to get creative with its intragroup balance sheets. Navios can drop ships off the Holdings books and down to one of the other entities once long-term charters are secured, and I would look for them to do that.
So I'm hanging in there with this one, and short-term pain should translate into long-term gain. Unlike oil drillers, Navios owns tangible assets -- massive cargo ships -- and thus, somehow, some way, there has to be an intrinsic value here. It's a deep, deep value and very contrarian play, but it will work.
