Shipping Stocks Stayed Docked In 2010

Since it was officially announced that the recession ended in the summer of 2009, shipping stocks have not recovered the way one would think. Even the surge in commodity prices that took hold in 2010 failed to propel shippers like many would expect.
Too Many Ships
Shipping by sea remains the only economical way to transport goods internationally. In many cases, it’s the only way. Large tankers are equipped for transporting things like iron ore, coal and other commodities. With China’s increased demand for all commodities and the  underlying rise in commodity prices, shippers have not captured the attention of investors as other asset classes have. Shipping rates, a key determinant in shipping profitability, have remained significantly below pre-recession peaks. At the peak, the Baltic Dry Index, the key measure of shipping rates, stood at over 11,000. Today, the BDI remains below 3,000. That’s as if the Dow Jones Industrial Average was sitting below 5,000 today.
To make matters worse, when shipping rates were at all-time highs, many shippers issued boatloads of debt to expand fleets. The result was a new order book that would bring on a massive supply of new ships over the next few years. As the economy began spiraling downward, the industry faced a disastrous scenario. Despite many new order cancellations, shipping rates remain stubbornly low due to an excess supply of ships.
Sailing Slowly
Against a near 10% year-to-date rise in the S&P 500, shipping stocks have not kept pace. Shares in Overseas Shipholding Group, Diana Shipping and Genco Shipping are all down for the year. DryShips, one of the largest dry bulk shippers in the world, has had a flat return in 2010. Teekay Shipping is the rare standout and is up over 40% year to date.
The Contrarian Approach
Contrarian investors are bound to feel as if the industry is ripe for a turnaround. Yet the contrarian approach hasn’t been successful in 2009 or 2010, unless you were lucky enough to have bought shares at the absolute bottom. Otherwise, shares in most shipping stocks remain well below their 2007 and 2008 peak levels. Unless the economy shows a fierce recovery in 2011, shipping stocks may not benefit from a contrarian thought process anytime soon.