Why Dry Bulk Shipping is going to be a big winner in 2022/2023. The sector is entering a multi-year super cycle.

Hi everybody, happy New Year. This is my first DD so hopefully I can convey my points, and why my account is 100% invested in dry bulk stocks. I posted this a couple weeks ago, but wanted to rewrite it to fix some things. ​ First, what is dry bulk shipping? Dry bulk shipping is the movement of commodities in bulk on ships. Coal, iron, grain, etc. are all popular commodities carried on these ships. The Baltic Dry Index (BDI), is an index that tracks the cost of transporting these commodities. When the BDI is high, it means that dry bulk shippers are making lots of money because they are benefitting from the rise in transport costs. ​ Historic levels of the Baltic Dry Index: The BDI peaked in May of 2008, hitting 11440. It soon collapsed afterwards due to the global recession, reduced demand for shipping, and the market being flooded with new vessels. For the last decade, the BDI has been trading in a tight range from roughly 750-1500. However, in 2021 the BDI rallied hard as economies recovered from COVID-19 along with increased demand from countries other than China, hitting a peak of 5650 in October 2021. The BDI is currently at 2217, down from its peak in October due to China cutting steel production for the Winter Olympics. ​ Baltic Dry Index (BDI) One thing that many may be wondering is if the high rates we're seeing now are sustainable. I believe not only that they are, but that they will continue to go higher, even further than the peak we saw in October 2021. I'll explain my reasons why demand is looking very healthy for the next few years, and will continue to grow. ​ In past years the BDI has largely been driven by China, and China only. This has changed in 2021, with a large portion of demand coming from countries such as Brazil and India. In fact, China has been slacking in demand this year due to strict COVID-19 restrictions, along with steel production limits so that they can have clear skies for the Winter Olympics. The limits will be lifted shortly after the Olympics, but what's important is that the BDI is maintaining decade high levels without China. When China reenters the picture sometime in March 2022, it could be the tipping point where demand outpaces supply. ​ From Star Bulk Carriers Q3 2021 Earnings Transcript: "And China basically wanted clear skies for the Olympic games. So it's a combination of clear skies and reduction of commodity prices from China. That's what their goal was. But let me make a side point here which I think is important. I was going through the imports of China earlier today and I realized that in the last 10 months of 2021, China actually imported 2 million tons less than last year. And you remember what we all used to say that if China sneezes, we will catch pneumonia -- the market will catch pneumonia. Well, China sneezed and we didn't catch exactly pneumonia. So I think that happened because the rest of the world came up." - Petros Pappas, CEO of Star Bulk Carriers answer when asked why rates are down from the October peak. "This market that we've seen during 2021 has been without China being in the picture. And that in our view means that once China re-enters at some point next year, it will sow a much stronger market." - Petros Pappas, final closing thoughts on the earnings call. ​ I highly recommend reading the entire transcript, but these two quotes support my points above. The next thing I want to talk about is the supply situation, and the reasons why there will be very little fleet growth for the next few years. ​ First, the shipping industry has been depressed for over a decade. The last time we saw a bull run in 2008, companies purchased a ton of vessels (which they later scrapped for metal), and then when the BDI collapsed, were stuck with useless vessels because there was no demand for them. It's highly unlikely that any company is going to want to take on the risk of substantially growing their fleet after what happened last time. Secondly, even if companies do want to grow their fleet, it will be very hard too. This is because shipbuilding capacity is down hard since 2008, and there isn't the space to build these ships. ​ Orderbook for new vessels In the last bull run, on average only 50 vessels were being delivered per year. If you look at today, it's roughly the same, with future years sharing the same average. What's happening is there simply isn't enough space in the shipyards to build these vessels in mass quantity, and there won't be for quite a few years. With 2022 and 2023 showing reluctance to take on new vessel orders, it's expected that capesize growth will only grow by 2.8%, and 1.6% overall for these two years. In short, not much is being added to the supply side for the next two years. ​ Now that I've discussed the supply / demand side of things, and why it's looking quite favorable, I want to point out the actual companies. Pretty much all dry bulk shippers follow the same chart pattern, and all are fair game, but I chose to go with Star Bulk Carriers ($SBLK). ​ $SBLK -1 year view, 155% return The stock pays a massive 22% annual dividend yield (although I don't expect the yield to stay this high as the stock will rise). I know you're probably thinking there is no way this is sustainable, but the good news is that Star Bulk has a dividend policy based on their cash flow. ​ Slide 5 of Q3 Earnings Presentation The company is extremely undervalued also, even after 155% YTD returns. Analysts have price targets averaging $35, and it's currently been trading in a range from $18-$24 for the last 8 months. The tighter and longer the trading range, the bigger the breakout. P/E Ratio: 4.21 EPS: $2.19 ​ Earnings growth for the past year ​ This consolidation reminds me of something... The company is very well managed, and is set to grow even if the BDI does not rally to record highs. Take a look at their debt and cash levels over the past two years. They have taken great advantage of the high rates seen in 2021, and have more cash than they did in 2008. ​ Slide 6 of Q3 Earnings Presentation Combining the dividends, the strengthening of the balance sheet, and the favorable supply/demand situation, $SBLK is a value investors dream. Oh, and did I mention the share buyback program? (https://www.starbulk.com/media/uploads_file/2021/08/06/p1fcc2uvdn1b3p19541tbo1kvbfat4.pdf) I think both shares and options can work well with this stock, you just have to pick which way you want to play it. It's a pretty safe play to buy the stock, collect dividends, and sell covered calls. On the other hand, I expect enough growth that LEAPs will generate high returns. ​ My positions: $SBLK Jan 2024 $25 calls (Yes, I know the spread is wide but I'm holding until expiration.) ​ TLDR: I am very bullish on the dry bulk sector for the next 2 years. The low vessel growth, combined with an increased demand for commodities will result in a favorable supply/demand situation, and dry bulk equities ($SBLK, $GOGL) will be making record profits. This isn't a sector much discussed on Reddit, but that's not a bad thing. You won't get rich overnight, but if you want to invest in a deep value asymmetrical opportunity, you'll be hard pressed to find one as good as this. ​ EDIT: A lot of people talking about $ZIM in the comments. I am also bullish on this stock as well, although they are focused on container shipping. I hold no position in $ZIM, but I think they will also do very well next year, although I have no thoughts past 2022.

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Why Dry Bulk Shipping is going to be a big winner in 2022/2023. The sector is entering a multi-year super cycle.

bullish

Hi everybody, happy New Year. This is my first DD so hopefully I can convey my points, and why my account is 100% invested in dry bulk stocks. I posted this a couple weeks ago, but wanted to rewrite it to fix some things.

First, what is dry bulk shipping? Dry bulk shipping is the movement of commodities in bulk on ships. Coal, iron, grain, etc. are all popular commodities carried on these ships. The Baltic Dry Index (BDI), is an index that tracks the cost of transporting these commodities. When the BDI is high, it means that dry bulk shippers are making lots of money because they are benefitting from the rise in transport costs.

Historic levels of the Baltic Dry Index:

The BDI peaked in May of 2008, hitting 11440. It soon collapsed afterwards due to the global recession, reduced demand for shipping, and the market being flooded with new vessels. For the last decade, the BDI has been trading in a tight range from roughly 750-1500. However, in 2021 the BDI rallied hard as economies recovered from COVID-19 along with increased demand from countries other than China, hitting a peak of 5650 in October 2021. The BDI is currently at 2217, down from its peak in October due to China cutting steel production for the Winter Olympics.

Baltic Dry Index (BDI)

One thing that many may be wondering is if the high rates we're seeing now are sustainable. I believe not only that they are, but that they will continue to go higher, even further than the peak we saw in October 2021. I'll explain my reasons why demand is looking very healthy for the next few years, and will continue to grow.

In past years the BDI has largely been driven by China, and China only. This has changed in 2021, with a large portion of demand coming from countries such as Brazil and India. In fact, China has been slacking in demand this year due to strict COVID-19 restrictions, along with steel production limits so that they can have clear skies for the Winter Olympics. The limits will be lifted shortly after the Olympics, but what's important is that the BDI is maintaining decade high levels without China. When China reenters the picture sometime in March 2022, it could be the tipping point where demand outpaces supply.

From Star Bulk Carriers Q3 2021 Earnings Transcript:

"And China basically wanted clear skies for the Olympic games. So it's a combination of clear skies and reduction of commodity prices from China. That's what their goal was. But let me make a side point here which I think is important. I was going through the imports of China earlier today and I realized that in the last 10 months of 2021, China actually imported 2 million tons less than last year. And you remember what we all used to say that if China sneezes, we will catch pneumonia -- the market will catch pneumonia. Well, China sneezed and we didn't catch exactly pneumonia. So I think that happened because the rest of the world came up." - Petros Pappas, CEO of Star Bulk Carriers answer when asked why rates are down from the October peak.

"This market that we've seen during 2021 has been without China being in the picture. And that in our view means that once China re-enters at some point next year, it will sow a much stronger market." - Petros Pappas, final closing thoughts on the earnings call.

I highly recommend reading the entire transcript, but these two quotes support my points above. The next thing I want to talk about is the supply situation, and the reasons why there will be very little fleet growth for the next few years.

First, the shipping industry has been depressed for over a decade. The last time we saw a bull run in 2008, companies purchased a ton of vessels (which they later scrapped for metal), and then when the BDI collapsed, were stuck with useless vessels because there was no demand for them. It's highly unlikely that any company is going to want to take on the risk of substantially growing their fleet after what happened last time.

Secondly, even if companies do want to grow their fleet, it will be very hard too. This is because shipbuilding capacity is down hard since 2008, and there isn't the space to build these ships.

Orderbook for new vessels

In the last bull run, on average only 50 vessels were being delivered per year. If you look at today, it's roughly the same, with future years sharing the same average. What's happening is there simply isn't enough space in the shipyards to build these vessels in mass quantity, and there won't be for quite a few years.

With 2022 and 2023 showing reluctance to take on new vessel orders, it's expected that capesize growth will only grow by 2.8%, and 1.6% overall for these two years. In short, not much is being added to the supply side for the next two years.

Now that I've discussed the supply / demand side of things, and why it's looking quite favorable, I want to point out the actual companies.

Pretty much all dry bulk shippers follow the same chart pattern, and all are fair game, but I chose to go with Star Bulk Carriers ($SBLK).

$SBLK -1 year view, 155% return

The stock pays a massive 22% annual dividend yield (although I don't expect the yield to stay this high as the stock will rise). I know you're probably thinking there is no way this is sustainable, but the good news is that Star Bulk has a dividend policy based on their cash flow.

Slide 5 of Q3 Earnings Presentation

The company is extremely undervalued also, even after 155% YTD returns. Analysts have price targets averaging $35, and it's currently been trading in a range from $18-$24 for the last 8 months. The tighter and longer the trading range, the bigger the breakout.

P/E Ratio: 4.21

EPS: $2.19

Earnings growth for the past year

This consolidation reminds me of something...

The company is very well managed, and is set to grow even if the BDI does not rally to record highs. Take a look at their debt and cash levels over the past two years. They have taken great advantage of the high rates seen in 2021, and have more cash than they did in 2008.

Slide 6 of Q3 Earnings Presentation

Combining the dividends, the strengthening of the balance sheet, and the favorable supply/demand situation, $SBLK is a value investors dream. Oh, and did I mention the share buyback program? (https://www.starbulk.com/media/uploads_file/2021/08/06/p1fcc2uvdn1b3p19541tbo1kvbfat4.pdf)

I think both shares and options can work well with this stock, you just have to pick which way you want to play it. It's a pretty safe play to buy the stock, collect dividends, and sell covered calls. On the other hand, I expect enough growth that LEAPs will generate high returns.

My positions:

$SBLK Jan 2024 $25 calls (Yes, I know the spread is wide but I'm holding until expiration.)

TLDR:

I am very bullish on the dry bulk sector for the next 2 years. The low vessel growth, combined with an increased demand for commodities will result in a favorable supply/demand situation, and dry bulk equities ($SBLK, $GOGL) will be making record profits. This isn't a sector much discussed on Reddit, but that's not a bad thing. You won't get rich overnight, but if you want to invest in a deep value asymmetrical opportunity, you'll be hard pressed to find one as good as this.

EDIT: A lot of people talking about $ZIM in the comments. I am also bullish on this stock as well, although they are focused on container shipping. I hold no position in $ZIM, but I think they will also do very well next year, although I have no thoughts past 2022.

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