Thursday, March 5, 2009

Why a positive divergence with rising Baltic Dry Index (BDI) but falling dry cargo share prices?

Let's analyze the positive divergence between the BDI and dry bulk share prices. Does this portend a serious basis for a change in fundamentals in dry bulk companies? My view is probably not at present. Dry bulk freight movements are difficult to predict, especially in these difficult times. One has to place higher importance on solvency and staying power to weather the markets rather than future profit expectations for the time being.

Last year 2008 underlined the difficult aspect of timing. It was really two markets in the from of Dr Jeckyl in the first half of the year with a very strong semester and then Mr Hyde in the second half with a record plunge.

This year 2009 there has been some inventory restocking with the fall in commodities prices of iron ore and coal that has brought cheer especially to the Capesize sector. Panamaxes have consistently underperformed. Handysizes are holding out better than the Panamaxes but not giving the same margins as the Capesizes. All sectors have been treading water with break-even levels but at least there is some breathing space of late except for the Panamax sector.

I place particular emphasis on 12-month time charter rates as a market benchmark. These rates show what an established charterer cargo operator will pay to fix and carry dry bulk tonnage over the next year. This takes out the distortions from spot market volatility. Capesize rates have improved to the levels that I cautiously forecasted last fall for example. The issue remains whether the recent market improvement is sustainable in view of the large orderbook of new tonnage coming out of the shipyards.

Unfortunately 2009 vessel orders cannot easily be turned back since these units are in advanced stages of construction. There is a lot more room in 2010-2012 for pushing out deliveries, canceling and renegotiations. The yards have improved margins due the fall in steel prices and this will lead to a fall in new building prices.

The market ahead is highly dependent on the timing of various Government stimulus packages' impact on dry bulk commodity demand. The risks are that rates may stay subdued (and for a large part below break-even).

We have already seen severe financial strain on a number of companies, with the result being contract defaults/re-negotiations. This applies to bank negotiations for loan defaults, charterer renegotiations for revised charter rates and ship yard renegotiations for pushed-out delivery dates and revised contract prices. So far most companies have met the first hurdles but there have been a few tragedies. It is hard to say that we are out of the woods yet.

Although many listed shipping companies look attractively priced on multiples, the downside risk to both cash flows and asset pricing is substantial if recent improvement in the BDI does not prove sustainable. This explains the increasing weakness in listed dry bulk stock prices despite the recent firming of the BDI.

No comments:

Post a Comment