Pitfalls of investing in a turnaround, May Bulk Carrier

The background for this post originated from me wanting to write an article about a the turn around possibilities for Malaysian Bulk Carrier.  But I can't be sure about a recommendation after reading more into the industry.

A lot of investors love to catch the bottom of a downturn.  The profits of investing at the bottom and selling at the top is tremendous.  If there was one industry that might be ripe for a turn around, it would be shipping.  But of course, a lot of analysts and funds called it a turn around play and it's been in the garbage for the last few years.

The dry bulk shipping industry seems like it fits the definition of a text book turn around perfectly.  In 2013, the industry has been in the doldrums with the 4th largest bankruptcy in  US history being from a shipper.  In 2014, 2 of the top 10 bankruptcies were in dry bulk shipping.  Investors have been salivating at a turn around like this for quite some time.  In the world of high priced equities, people want to put their money somewhere that is undervalued. 

Here are three major reasons why a turnaround might not be so easy for shipping: 

1.  Turnarounds happen when there is severe under capacity compared to overcapacity.  Over the last few years, the shipping industry has built a lot of capacity.  I'm not sure if all the capacity has been wrung from the system.  Bankruptcy does not automatically mean capacity destruction.  Are companies in the industry scrapping or mothballing their ships?  Seeing how the price of iron has plummeted, it doesn't make sense for ship makers to scrap their ships,  scrap metal prices aren't so hot, so I'm not certain that the industry has wrung the over capacity out. 

If the companies have been mothballing their ships like I suspect, then it would be a rather simple process to bring them to operational status.  Hence probably why shipping rates haven't taken off like a rocket, and thus holding profits in the industry back.  Unfortunately I haven't the time to do the large amount of research required in this area so I'm only speculating.

2.  New technology.  There is none in shipping that so far has made the cost of operations much lower.  Materials still are the same.  Ships aren't that more efficient from a 10 years ago.  Lower costs to shipping will bring new opportunities for profit and revenue growth.  Other markets will now consider using the industry if it means lower shipping rates than before whereas they wouldn't have in the past.

For example, the airline industry is booming because of new planes which are 20 percent more fuel efficient.  This is huge.  Air lines will be able to lower their prices even more and reach a new breed of customer they haven't reached before.  I don't see anything of this sort in shipping.  Nothing revolutionary has happened.

3.  Current economic environment.  The current environment of low interest rates isn't conducive to capacity reduction.  Excess supply of bulk ships can be kept on stand by as interest rates are incredibly low.  Companies and traders have low interest rates supporting them, so they will wait it out as long as they can raise money from loans and investors.

Given some of the major reasons I've listed, I'm inclined to stay away from the shipping industry until scrap metal prices or interest rates make it more reasonable to strip capacity from the system.  But given how there is an abundance of metal, particularly iron, I'm not foreseeing this happening any time soon.