Time to Bulk Up on This MLP?
When will the dry bulk shipping market finally emerge from its malaise? It’s too soon to tell, especially given the global macroeconomic headwinds. But a figure buried in Navios Maritime Partners LP’s (NYSE: NMM) recent earnings report appears to offer a glimmer of hope. The bad news is that if the numbers Navios posted have implications for the broader industry, investors may have to wait until 2014 for a turnaround.
Fortunately, the master limited partnership’s (MLP) units yield an enticing 11.8 percent, so unitholders will be well compensated while they wait.
Additionally, Navios has remained largely insulated from the dry bulk industry’s doldrums because the vast majority of its fleet of 21 dry bulk carriers is already under contract. Indeed, more than 70 percent of its charters are of long-term duration, ranging from six to 10 years. In the near term, 99.3 percent of its fleet’s available days are contracted out for the remainder of 2012, while 83 percent are contracted out for 2013.
In terms of average daily charter-out rates, also known as the time charter equivalent rate (TCE), 2013 so far appears to offer a modest 2.6 percent drop to $27,987 from $28,734. But then in 2014, charter-out rates rise 11.5 percent to $31,219. And 47.8 percent of its fleet’s available days have already been contracted out at this higher rate.
In the interim, thanks to a conservative management team and a diversified and creditworthy customer base, the company should have the financial strength to endure a deteriorating global economy. In fact, the health of the dry bulk shipping industry is considered a leading indicator of future global economic growth, so it bears watching closely.
Although the fourth quarter of the year is typically a seasonally strong period for the industry, the overall atmosphere remains dour. Back in February, the Baltic Dry Index (BDI), which measures the cost of seaborne transportation of materials such as coal and iron, hit a low of 647, a level not seen since 1986. It subsequently climbed 80.1 percent to 1165 in May, before dropping again over the summer.
The BDI breached the 1,100 level again in late October, and then slumped to its most recent level of 916, which is 41.6 percent higher than the aforementioned low, but still down 21.4 percent from its year-to-date high. More important, the BDI is a far, far cry from its all-time high of 11,793, set back in May 2008 just as the global financial crisis was gaining steam.
The BDI is regarded as a leading economic indicator because the supply of dry bulk carriers is extraordinarily sensitive to any shifts in global demand for the raw materials they transport. That sensitivity is clearly evidenced by the BDI’s volatility.
However, Navios’ management team hopes to use its superior position to exploit industry weakness. This year, it’s already expanded its fleet by almost 17 percent from a year ago, and it’s poised to make additional opportunistic acquisitions.
Meanwhile, the oversupply of ships in the industry should finally wane. Roughly 13 percent of industry vessels are over 20 years old, so the percentage of the fleet forecast to face demolition this year is projected to rise 1.4 percentage points from a year ago to 5.6 percent.
And the glut of new ships slated for delivery, known in industry parlance as newbuilding, is expected to plunge nearly 64 percent in 2013 to 50.5 million deadweight tonnes (DWT) from 138.9 million DWT. Next year’s actual amount of new deadweight tonnage could actually be even lower than that, as only 65 percent to 70 percent of orders are typically delivered in the calendar year for which they were originally scheduled.
Since the global demand picture is so uncertain, this reduction in vessel supply will be key for the strongest players in the industry to survive for the better days eventually ahead. And until that time comes, Navios is well positioned to take advantage of competitors’ misfortune.