Oversupply has kept dry-bulk shippers
in the brig, and it will take some time before they are squared away. Strong
demand for the dry-bulk trade continues to be fully offset by available
capacity in the existing world fleet. Despite record-breaking scrapping rates
and elevated slippage rates, oversupply is expected to keep a lid on freight
rates for all of 2012. When the Baltic Dry Index--which measures shipping
demand versus supply--reached a 25-year low Feb. 3, some industry participants
called for a bottom. However, we think headwinds will weigh heavily for some
time, and we would delay investment in this market until the order book trims
down and the rate of new orders weakens. We think this is likely to occur in
late 2012, at the earliest, or early 2013.
Despite the near-term pains
anticipated in dry-bulk shipping, we think many of the companies we cover are
fairly valued to slightly undervalued. Initial first-quarter earnings reports
have reaffirmed our view that 2012 will be difficult for ship owners and, as a
result, our dry-bulk shippers have traded lower. We think Eagle Bulk Shipping
and Genco Shipping & Trading are the most exposed to a prolonged weak
period in shipping. Conversely, Diana Shipping and Navios Maritime Holdings are
our two favorite picks to weather an extended downturn.
China Still Fueling
Demand, but So Is India
Chinese demand for iron ore and coal
continues to be the biggest driver in the dry-bulk trade. According to the
World Steel Association, Chinese steel production increased 8.9% to 694.5
million tons in 2011, increasing its share of world steel production to 45.5%
in 2011 from 44.7% in 2010. Despite the recent slowdown, we're optimistic that
China's appetite for iron ore and coal remains firm longer term, with a growing
population leading to increased housing and infrastructure projects. In 2011,
the emerging economy imported 687 million metric tons of iron ore, up 11% year
over year, and increased coal imports used in steelmaking and power generation
by an estimated 13% year over year. China accounts for 60% of iron ore
consumption worldwide and is responsible for 35% of the global dry-bulk
shipping trade.
India has also become a major dry-bulk
consumer since it has taken initial steps to industrialize and urbanize. To
keep pace with expanding steel and electricity production, India coal imports
have increased 25% compounded annually since 2006. According to the Central
Electricity Authority of India, elevated demand levels should continue, since
65% of new power generation is projected to be coal-fired. The country now
imports more coal per year than the United Kingdom, Italy, France, and Germany
combined.
We expect China will remain the
dominant steel producer and consumer worldwide, with India the fourth-largest
(behind the United States and Japan), and we expect these countries will fuel
demand growth over the long run. The global steel and iron ore trade reached a
record 1.1 billion metric tons in 2011, increasing imports for the 10th
consecutive year, and we think the demand for dry-bulk commodities will remain
healthy in 2012 despite a slowing Chinese economy.
2012 Deliveries Signal
Oversupply
Ship scrapping is on pace to reach an
all-time high for the second consecutive year, and slippage rates are expected
to remain elevated in 2012. While these trends are positive for ship owners, we
think higher scrapping and slippage rates are not enough to mitigate
oversupply.
We think the 100 million deadweight
tons, net of delivery delays and order cancellations, that are still scheduled
to enter the global dry-bulk fleet in 2012 will carry forward the oversupply
issues that have plagued the industry. While we're encouraged to see the global
order book materially trim down to 28% of the existing world fleet (fleet stood
at 627 million DWT as of February 2012), compared with 45% a year ago (fleet as
of February 2011 was 545 million DWT), we're still concerned about the
scheduled 19% supply growth rate. However, we like that scrapping rates are on
pace to mint an all-time high for the second consecutive year. As of February,
the market had scrapped 4.0 million DWT compared with 2.4 million DWT in the
comparable prior-year period and 22.3 million DWT for 2011. Scrapping in 2010
amounted to 5.9 million DWT. After accounting for new highs in scrapping, we
estimate the vessel supply growth to be around 15%. Still, given our
expectations of 6%-8% growth in demand for dry-bulk trade, we estimate net
oversupply of 7%-9% will keep a lid on freight rates for all of 2012.
Source:
By Paul Choi. 9 May 2012
http://news.morningstar.com/articlenet/article.aspx?id=553360
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