Dry Bulk Drowns
The rising dollar and declining commodity prices have caused investors to jump ship despite the strong outlook for dry bulk shipping stocks. It does not help that worries about a global economic slowdown, especially in China and Europe, and lower steel prices in China have cut into demand for shipping in the near term.
Even the generally optimistic shipping analysts are sitting up and taking notice. On Wednesday, Lazard Capital Markets analyst Urs Dur downgraded Eagle Bulk Shipping, Genco Shipping and Trading and Navios Maritime Holding to "hold," from "buy," despite the fact that their earnings-to-yield outlook is unchanged and they have little exposure to Baltic Dry index weakness.
Chinese iron ore inventories are increasing, while steel prices are declining. Dur said that Chinese iron ore inventories at its ports ballooned last week to 64.8 million tons, the highest level this year, with an estimated six to eight weeks' supply, from 40 million tons at the end of August 2007.
Even though steel production in China has increased more than 11% this year and China's reliance on imported iron ore needed to produce that steel has increased 20% year on year, Dur said, "declining steel prices and increasing steel inventories indicate softening near-term demand for spot Capesize ships in the near term."
Dahlman Rose analyst Omar Nokta said that there are conflicting reports about a rumored iron ore price hike by Vale. Chinese officials have said Vale sent notification to Chinese customers of an additional 20 percentage-point increase over the initial 65% to 71% price hike for iron ore fines, although Vale has not confirmed the change, he said.
These rumors are "clouding the outlook for the market," although he warned that if there were a price hike, it "would have a near-term negative impact and explain the violent moves down over the past three days."
While analysts have been debating over the past few weeks when the dry bulk shippers will see a turnaround, Dur said that the Baltic Dry index, which is managed by the Baltic Exchange in London and measures dry bulk shipping rates on 40 routes across the world, will likely weaken further in the near term. Even though the BDI remains at record levels, the supply of Capesize and Panamax ships in the Pacific basin has been increasing, he noted, bringing down prices.
The dark cloud for dry bulk is that Dur expected spot Capesize rates to drop below the $90,000 per day mark by Friday, $4,000 less than Thursday. He also forecast the BDI is likely to decline another 5% to 10%. Since the dry bulk stocks tend to trade with the BDI, or at least closely track it, Dur remarked, "downward pressure on the BDI does not cultivate a buying environment."
But, by Dur's estimate, the BDI and the global economic outlook will both pick up in the fourth quarter: "When the macro economy improves, we could become bullish quickly." By the end of September, he expects steam coal demand to increase from China and iron ore inventories to decline, which should improve the outlook for the BDI and dry bulk stocks. Over the long term, lower commodity prices, Dur said, are good for the global economy and shipping.
Nokta thinks the bottom will come sooner rather than later. With steel prices stabilizing over the past few days--Chinese spot rebar prices are up approximately $10 per ton from last week's low point--"the Capesize market should be approaching a near-term bottom, as charterers would be enticed to re-enter the market following widened production margins as a result of the lower freight but rising steel price."
The dry bulk shipping stocks drowned on Thursday. Genco sank 4.0%, or $2.14, to $51.00 at the close, while Freeseas slid 4.2%, or 25 cents, to $5.67. Eagle Bulk fell 4.2%, or 98 cents, to $22.55. Euroseas shed 4.7%, or 57 cents, to $11.70. Excel Maritime Carriers lost 4.5%, or $1.28, to $27.35.