Another major issue that hounds the dry bulk shipping industry is the cheap fleet price, despite the robust demand. The average DryShips freight rate for C4TC is $6,056 per day, down 13% year-over-year. Likewise, the P4TC freight rate is also down 12% year-over-year at $7,055 per day.
This is well below the peak price of more than $100,000 per day during the heydays of 2008. Baltic Exchange, a London-based freight cost assessor, estimated that fleet rates will increase this year to $12,000. By 2014, it will further rise to $20,000 due to rising demand amid expected declining growth of dry bulk ships.
The Baltic Dry Index closed on May 22 at 820 points. This is still far from recovery to the record high of 11,793 back in 2008. However, the index steadily increases and soon it may break the 1,000-point threshold, which was last seen in 2010.
According to Bank of America Merrill Lynch, freight rates will see a significant increase by 2015. This will be triggered by the increasing worldwide demand, while vessel tonnage growth slows down. The demand growth is expected to outpace the fleet capacity additions. The bank further projected that by next year, the sector will see a major shift, and the excess supplies in the market will start to shrink.
However, the recovery of bulk freight rates will neither come overnight nor in a few months. It may take several months, maybe a year or two, before the rates will stabilize toward the profitable level. But, the main point is there is still hope for the dry bulk shipping industry. It may soon rise one day, side-by-side with the industrial boom and growth in the construction and retail sectors.
Bottom line
So, going back to the main issue here, is it time to abandon DryShips Inc. (NASDAQ:DRYS)? Not yet, given the discussion above. In fact, it may be poised for a rebound in the near future. On the contrary, now may be the best time to jump on board to secure a nice position and remain long. DryShips shares are relatively cheap at below $2.50 per share. This is a far cry from the price level of $60-$100 per share back in 2008, prior to the recession.
While DryShips Inc. (NASDAQ:DRYS) is still traveling through stormy waters, the storm is weakening and about to end. Tranquil waters await the dry bulk shipping industry, amid rising demand in commodities in a flourishing worldwide economy. When DryShips enters the recovery phase, shareholders shall enjoy the fantastic ride up.
Therefore, hold on to your life vest. The ship is not sinking, and DryShips will continue to safely cruise through the bad weathers still ahead. This is not a solitary view, but an outlook shared by the majority of the analyst firms recommending a hold.
The article Is It Time To Abandon Ship? originally appeared on Fool.com and is written by Nur Tarkak.
Nur Tarkak has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Nur is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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