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Do Time-Charter Rates Still Have More Downside?

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Jul. 1 2015, Updated 2:05 p.m. ET

Time-charter contracts

A time charter is a contract for the use of a vessel for a fixed period of time at a specified daily rate. Navios Maritime Partners L.P. (NMM) has a different strategy than peers like Safe Bulkers (SB) and DryShips Inc. (DRYS) for tying revenues to spot versus time-charter contracts.

These companies from time-to-time engage in short-term time charter agreements, or the spot market. But Navios Maritime Partners’ and Diana Shipping (DSX) have a chartering strategy to charter the bulk of their vessels long term, for 16 to 62 months.

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Lows of time-charter rates

Chartering long-term provides visibility to revenues and cash flows. But there’s always a risk involved if the contracts roll over in a weak market as we’re experiencing now. Based on shipping companies’ fixed operating expenses, we can estimate if time-charter rates still have more downside compared to prevailing rates.

The above graph shows the 12-month time-charter rates year-to-date for 2014 and 2015. On a year-to-date basis, 12-month charter rates for Capesize are down 63% year-over-year. Rates for Panamax and Handymax are down 44% and 34%, respectively.

Not much downside left

In the previous article, we saw the daily vessel operating expenses for dry bulk shipping companies. The average for the dry bulk sector based on expenses of the top four dry bulkers is close to $5,600 per day. Add general and administrative expenses as well as interest expenses to that, and the margin these companies will make at current 12-month time-charter rates is very thin.

Not many companies are willing to roll over their 12-month contracts. We can estimate that the current time-charter rates should not go down much further. We’re witnessing pretty much the floor at prevailing rates.

NMM forms 2.7% of the Guggenheim Shipping ETF (SEA). SEA, in turn, provides exposure to the global shipping market. SPDR S&P Metals and Mining Index (XME), on the other hand, provides exposure to materials space.

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