Highlight Worst may be over for dry bulk shipping; Maybulk looks up

by **Cals** Fri 04 Oct 2013, 16:54

Highlight Worst may be over for dry bulk shipping; Maybulk looks up

Business & Markets 2013

Written by Janice Melissa Thean of theedgemalaysia.com

Friday, 04 October 2013 16:00

AS China’s strong demand for iron ore drives up the price of ship charters, analysts believe that the worst could be over for the sluggish shipping sector.

The Baltic Dry Index (BDI), the bellwether for shipping freight rates, started moving up about three months ago and reached a two-year high of 2,127 at last Wednesday’s close. Year to date, the BDI has gained more than 200%.

“We believe that 2013 will be the bottom of the trough cycle for dry bulk, so it should recover soon,” MIDF Research analyst Chua Boon Kian tells The Edge.

“However, the recent uptick was faster than expected, thus we think it will retreat to 1,500 levels,” he says, adding that a recovery is still on the cards for the sector.

Meanwhile, Nathan Gee and Paul Dewberry of Bank of America Merrill Lynch point out that the uptrend has been primarily driven by seasonal rather than structural factors.

“Investors should brace for seasonal tailwinds to reverse in 1Q2014. However, the industry will benefit from a fundamental turn from 2Q2014 as the demand/supply balance turns positive for the first time since 2008,” they say in a Sept 17 note.

Bank of America Merrill Lynch forecasts average BDI to come in at 1,050 in 2013 and 1,350 in 2014.

The BDI had been trending at about 9,500 before the financial crisis. It then plunged more than 91% over a six-month period in mid-2008.

“We are currently about halfway through the 10-year down cycle so we have another five years to go,” says an analyst with a local bank-backed research house.

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“I expect to see a gradual recovery starting from next year as supply growth starts to ease off,” the analyst adds. Presently, there is a 30% oversupply on the market.

But any sustained recovery in shipping rates for the sector hinges on how well China’s economy performs as the country is accountable for about 40% to 50% of the global dry bulk demand.

“The recent uptrend [in the BDI] should be sustainable as long as the Chinese iron ore re-stocking continues,” the analyst says.

Low iron ore inventory levels in China have spurred restocking activities. In July, the country’s iron ore imports reached a new high of 73.1 million metric tons, 26% higher than a year ago and 17% higher month on month. In August, import of iron ore eased to 69 million tonnes.

Three weeks ago, Bloomberg reported that charter rates for ships carrying iron ore reached a 33-month high as China rebuilt its inventories. Rates for Capesize vessels rose 9.7% to US$32,945 (RM106,217) a day, the highest since November 2010.

Dry bulk charter rates are largely driven by large vessels — Capesize and Panamax. According to a Sept 12 report by JPMorgan, the number of Capesize vessels chartered that week rose 111% to 38 from the year before (+81% w-o-w). Of the 38 Capesize vessels, 82% were China-bound. Furthermore, 93% of China’s shipments were for iron ore.

“With many Capesizes now occupied with carrying iron ore, there will be fewer available to ship coal, forcing shippers to use Panamaxes instead,” notes CIMB Research analyst Raymond Yap in a Sept 12 report.

“We are expecting Chinese iron ore demand to rise 8% in 2013 and the global iron ore trade to grow 6%, dragged down by just 2% import growth for the rest of Asia and merely 3% growth for Europe,” he forecasts.

“Healthy demand for iron ore, coal and grain, which collectively make up about 60% of global bulk trade, should contribute to the improving rates,” Quah He Wei of HwangDBS Vickers Research tells The Edge.

MIDF’s Chua is optimistic that demand from China will be sustained based on the country’s manufacturing Purchasing Managers’ Index (PMI), which recently expanded. On Sept 2, China’s National Bureau of Statistics announced that the PMI, which is an indication of the country’s manufacturing sectors, rose to 51 in August from 50.3 in the prior month.

Anything more than 50 indicates that the sector is accelerating while a reading below 50 points to a contraction.
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How to ride the wave

Presently, only two shipping stocks in the region appeal to analysts: Hong Kong-listed Pacific Basin Shipping Ltd (PacBasin) and Malaysian Bulk Carriers Bhd (Maybulk).

CIMB Research has “Outperform” calls on both stocks based on its view that their shares are undervalued and they have been able to remain profitable.

It has a target price of HK$5.70 on PacBasin and RM2.02 on Maybulk. Last Thursday, these stocks closed at HK$5.23 and RM1.88 respectively. YTD, PacBasin and Maybulk have gained 20.23% and 41.35% respectively.

“This is because the dry bulk cycle will only recover gradually, and companies that are suffering from large losses may see their balance sheets eventually destroyed before the cycle turns,” CIMB’s Yap says.

Bank of America Merrill Lynch raised its target price on PacBasin to HK$5.90 from HK$5, after taking into account its fleet expansion. Since September, the company has committed to buy 21 second-hand ships and has made orders for six new ships from Japanese yards.

One drawback is that PacBasin does not own any Capesize vessels that are most in demand at the moment.

“Momentum investors would probably sell and the share price will drop too, but that would be a perfect opportunity for investors who have not benefited from the present rally to enter the stock,” Yap notes. Despite this, he remains confident of his “outperform” call on PacBasin as it is one of the “best-quality” companies in the sector.

Maybulk does not own any Capesize vessels either. “Maybulk should benefit from the overall increase of charter rates lately, which are primarily driven by the increased shipment of iron ore in China,” HwangDBS’ Quah notes.

HwangDBS has a “buy” call on Maybulk, but has its target price under review in light of the recent rate spike.

MIDF’s Chua concurs with this sentiment, adding that with five Panamax, six Handysize and five Supramax vessels, Maybulk has a good mix in terms of fleet composition. The research house is “neutral” on Maybulk and values its stock at RM1.90.

An added catalyst for Maybulk could be the forthcoming listing of its Singapore-based associate PACC Offshore Services Holdings Pte Ltd (POSH), which could take place by end-2013 or early 2014. POSH, which will be listed on the Singapore Exchange, is an offshore marine services company in which Maybulk has a 21% stake.

According to news reports in August, POSH could raise between RM762 million and RM1.27 billion at the initial public offering.

Maybulk rose to an intraday-high of RM1.94 on July 26 but fell 21.75% to RM1.518 on Aug 28. It has since rebounded and closed at RM1.84 on Oct 3.

This story first appeared in The Edge Malaysia Weekly Edition, on September 30 - October 6, 2013.