Tuesday, March 10, 2009

Eitzen moves to consolidation after a period of aggressive growth,

The Eitzen group has expanded aggressively in the chemical sector the last few years, becoming a major operator. The rapid growth caused them initially operations problems. They started to suffer in bottom line results last year. Now with the recession leading to declines in both cargo volumes and rates, management has its hands full.

Whilst the major established operators like Odfjell and Stolt enjoyed robust profits in 2008, a slashing of its fleet value and soaring expenses sent Eitzen Chemical to a US$ 192.5 mio loss last year.

Eitzen’s fleet lost 20% of its value in the second half of 2008 leading the Norwegian to book an impairment charge of US$ 156.2 mio in the fourth quarter alone. Over the course of the whole year impairment charges reached US$ 160 mio.

During the last five months of 2008, a fall in seaborne chemical transportation rates was seen in the order of 30% or more. Volumes on key routes like the transatlantic dropped to very low levels. This development was brought about by the plunge in global macro economic activity, which severely impacted chemical demand. Many production plants had to reduce operating rates (and some temporarily idled output) due to the lack of available credit. This further hurt trade, and thus negatively impacted fleet utilization.

The state of the chemical shipping market has so far in 2009 not changed dramatically from that seen towards the end of last year. Volumes remain fragile, and the question is when trade will start to pickup again? Most charterers are fixing only on a short-term trip charter basis until visibility improves.

Eitzen Chemical's average rates for the company’s fleet below 30,000-dwt fell 5.8% from the third quarter to the fourth quarter and those for the fleet above this size slipped 9.4% in the same period.

With a projected gross fleet growth of 20.8% and 12% in 2009 and 2010 respectively, the chemical shipping market is faced with a high delivery schedule of new vessels. The credit crunch could perhaps have some impact on the magnitude of potential order cancelations and renegotiations so the actual delivery schedule could differ.

Whilst major chemical tanker companies like Stolt and Odfjell have largely covered financing needs for their capex requirements, Eitzen Chemical has about $184 m of vessel capex to fund in 2009/2010. They could be exposed to liquidity problems if tight market conditions persist.

Trade patterns are changing with major Middle East refinery projects coming on stream in the next few years. Production at source give them a competitive advantage and chemical production has higher margins than feedstocks. This will increase demand for chemical vessels but it could lead to cannibalization of the product tankers and LNG trade, with increased domestic demand for these products.

In the meantime, the reclassification of vegetable oil cargoes to chemical vessels will help mitigate somewhat this market recession. Intensified scrapping will also assist. There have been major design changes in chemical vessels and much of the older fleet is obsolete.

Most companies in the chemical sector have solid NAV support. That said, the profits are likely to be at sustained low levels. In addition to the potential for further pressure on asset prices, this should induce a pricing discount to NAV.

Selected stocks such as Stolt-Nielsen with their very strong contract base and balance sheet may prove robust value cases in the longer run.

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