Friday, August 30, 2013

Dry Bulk Shipping : Buy before the likely 4Q bounce (CS)

Dry Bulk Shipping
New report: Buy before the likely 4Q bounce

● As iron ore imports continue to displace higher-priced domestic PRC production we see a sustained bid for capesize tonnage coinciding with the passing of summer's slow season.

● China's steel production looks set to exceed our expectations and the feedstock for its mills is increasingly being sourced abroad, driving up capesize rates. A 4Q13 rebound in grain exports from the US should also buoy rates among the smaller classes of vessels. Click here for full report.

● We see iron ore imports to China rising 25% from 2012 to 76% of total consumption by 2015 and foreign-sourced coal accounting for 6.4% of total by 2014 – up from 6.1% at the end of 2012.

● With FFAs pointing to cape rates rising an average 106% YoY in 2H13 (vs our 72% estimate) and leading the dry bulk universe higher, we naturally like those companies with greatest exposure, namely: Mitsui OSK Lines, Nippon Yusen Kaisha and China Shipping Development. Broader demand recovery and supply constraint should translate into firmer rates, lifting all players, however, and we see rising vessel values as a precursor to this.

Price and content differential drive substitution
China's steel production and where its mills source their feedstock are critical to the demand for imported iron ore. This is the world's single largest seaborne cargo and determines the demand for capesize vessels. We see increasing signs that factors including ore production (both international and onshore in the PRC) as well as the price of imported material are supportive of a sustained increase in imported ore volumes. Falling iron content in China's domestic ore and an anticipated slump in import prices are set to drive a prolonged displacement of local output by imports from Australia and Brazil. We see this playing out over the next two years as output from high-cost, low-quality domestic mines falls and overseas supplies surge.

For the rest of this year we expect imports to grow at a high single-digit pace, supported by robust Chinese steel production, an easier licensing system for imports, abating climatic factors and capacity expansion at Australian and Brazilian mines. The Baltic Dry Index rises 25% on average from August to the annual high point in November, although the seasonal upswing this year is likely to be far more pronounced than in previous years. Capesize rates should be boosted by China's ore production imports and rates for smaller handysize, handymax and supramax vessels should be lifted by the 4Q grain season. The US is expected to export 11% more wheat, corn and soy beans in 2013, reflecting crop failures in China and Bangladesh as well as reversal of last year's drought impact

This combination of factors should see average charter rates for capesize vessels rise from $6,500/day in 1H13 to US$11,162 in 2H, with FFAs (US$18,694) and today's spot market (US$16,553) pointing even higher.

Anticipation of a firmer rate environment has already become visible in bulk shipping companies' market value-adjusted P/B ratios. For our universe this has declined almost half a multiple turn since its peak of around 2x at the end of last year as values have improved; this despite a firming in listed company prices, with all bulkers trading below their replacement cost.

Source/Extract/Excerpts/来源/转贴/摘录: Credit Suisse
Publish date: 30/08/13

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