DryShips, Diana Shares May Gain as China Demand Boosts Rates By Alaric Nightingale Sept. 12 (Bloomberg) -- DryShips Inc., Diana Shipping Inc. and four other companies that ship raw materials sold shares to the public last year as rates for the freight they carry soared. Now, four of the companies' shares are below their initial public offering price, and the other two have risen less than the 49 percent increase in freight rates. Stock prices are depressed by concern that rates will decline, said Richard S.T. Hunter of Lighthouse Capital Management Inc. in Houston. China's growing economy, and the demand it's creating for commodities such as steel and coal, is driving the surge in freight rates, and that won't change any time soon, he said. Shares will rise as investors realize that revenue for shipping companies is on the upswing, he said. ``The most profitable industry out there right now is shipping,'' said Hunter, who helps manage $400 million and owns shares of New York-based Eagle Bulk Shipping Inc. DryShips shares have declined 22 percent in the past year to $13.05, below the company's IPO price of $18 in 2005. Diana has fallen 17 percent in the past year to $12.58, below its offering price of $17. Both companies are based in Athens. Quintana Maritime Ltd., a Glyfada, Greece-based shipper, has dropped 13 percent to $9.80 from its IPO price of $11.50. Hamilton, Bermuda-based TBS International Ltd., has slumped 35 percent to $7.78, below its IPO price of $10. Ore Shipments Eagle shares have risen 9 percent in the past 12 months and Genco Shipping & Trading Ltd. has gained 6.8 percent. Both companies are based in New York. Diana is listed on the New York Stock Exchange. The other five trade on the Nasdaq Stock Market in the U.S. Fourth-quarter earnings per share for DryShips will be 81 cents a share, based on the average estimate of four analysts surveyed by Thomson Financial. That's more than double the amount it earned in the second quarter. Diana's profit per share will be 18 percent higher in the final three months of the year. While the Baltic Dry Index, a benchmark for freight rates, has risen 49 percent in the past 12 months, the price for individual shipments has risen even more at times in the face of demand from China. BHP Billiton Ltd., the world's biggest mining company, in February paid $16,250 a day to hire a ship to send 70,000 tons of Australian iron ore to China. Six months later, the company paid almost three quarters more -- $28,000 a day -- for the same voyage, according to London-based shipbroker Galbraith's Ltd. Iron ore is used to produce steel. Chinese industrial production rose 16.7 percent in July, and the economy expanded 11.3 percent in the second quarter. `Substantial' Demand The iron ore, coal and coke that Chinese companies sucked in this year fed record steel production. China produced 36.1 million metric tons of the alloy in July, up 22 percent from a year earlier, according to the Brussels-based International Iron and Steel Institute, boosting demand for export and import shipments at a stroke. ``The demand for iron ore and coal is pretty substantial, unless you think that the market in China is going to tank, which I don't think is going to happen,'' said Scott Black, who manages $1.6 billion for Delphi Management Inc. in Boston. He owns DryShips shares. Still, most owners charter their ships on long-term contracts, and freight rates can swing wildly, reducing owners' ability to take advantage of the current surge. Last year, freight index swung between a high of 4,880 and a low of 1,747. The rate moved between 6,208 and 2,622 in 2004. By the time many owners agree to their next one- or two-year charters, daily hire rates could, based on historical price swings, have fallen by half or more. Owners earned $20,902 on average daily in 2001, $12,860 in 2002 and $11,962 in 2003. Build Rate Genco, which didn't hire out most of its ships on long-term contracts, is the biggest stock market gainer. It's risen 34 percent since freight rates started going up in January. Investors also are concerned that too many new ships are being built. The capacity of all the ships that carry so-called dry bulk will rise by about 25 percent to 80 million deadweight tons over the next four years, according to a report last month from Galbraith's. Demand for shipments will increase from 2.7 billion metric tons last year to 3 billion metric tons by 2010. Investor concern about an excess of ships is overblown, said Black. ``This year will be the peak build rate,'' he said. ``After that, the increase in demand outstrips supply. If you are a short-term investor, it probably doesn't make sense. If you have a two- or three-year horizon, it's pretty good.'' Some investors say they prefer the more-stable earnings of companies that hire out their ships for one- or two-year charters. ``We are big fans of long-term contracts,'' said Hunter of Lighthouse Capital. ``We like reliable, visible earnings.'' Dividend Payout Fans of the stocks also point to their above-average dividend yields. DryShips pays an annual dividend equal to 6.1 percent of the company's stock price; Diana's payout is 11.3 percent. Companies in the S&P 500 pay 1.9 percent on average. Black and John Buckingham, president of Al Frank Asset Management in Laguna Beach, California, both say DryShips is the most attractive shipping stock. Both men point out that its assets minus liabilities, known as book value, is about the same as the company's stock market value, indicating it's cheap. ``We see a company trading at book value, yielding 6 percent and trading for less than five times estimated earnings,'' said Buckingham, who manages $800 million. ``What's not to like?'' To contact the reporter on this story: Alaric Nightingale in London at Anightingal1@bloomberg.net Last Updated: September 11, 2006 19:14 EDT