Friday, October 25, 2013

Implications of the capesize crash (CIMB)

 Implications of the capesize crash
Capesize rates have plunged 41% from the recent high of US$42,211/day on 25 September to US$24,845 at yesterday’s close as the Chinese halt their restocking of iron ore for now. But supramax and handysize rates continued to rise 10-15% in the past month.

 Although we are Neutral on the sector, we reiterate an Outperform on our top pick, Pacific Basin as we expect the rate uptrend for smaller vessel classes to continue in 4Q13. We also have Maybulk on Outperform but Underperforms on PSL and STX Pan Ocean due to continued losses from the core bulk shipping business.

What Happened
The recent capesize rally lasted 125 days from 24 May to 25 Sep and has resulted in an eightfold rise in capesize rates. The rally was supported by a 15% yoy rise in China’s Sep iron ore imports, backed by low iron ore inventories and strong crude steel production growth. While iron ore stocks are still very low, China’s restocking exercise may be over for now as Chinese finished steel prices have resumed their weakening trend due to overproduction, crimping profits for steel mills. Also, China’s electricity production fell 13% mom in Sep, suggesting slowing momentum in its energy-intensive heavy industry, which is dominated by state-owned firms and which led the summer rebound. Also, while Chinese property prices continue to rise, property inventories continue to increase and recent rates of construction cannot be sustained as property sales are barely higher than they were a year ago.

What We Think Share prices of dry bulk companies have done well since end-Jun when the capesize rally began. They have kept most of their gains in the past month despite the decline in capesize rates. But the market may no longer look so kindly on companies with capesize exposure (e.g. China Cosco or China Shipping Devt) or on other stocks which have exceeded their underlying SOP valuations.

What You Should Do
Pacific Basin is safe as it continues to trade at a significant discount to its underlying SOP. Should its share price fall with the capesize rate collapse, it would be a perfect opportunity for investors who have not participated in the past four months’ rally to enter the stock. Pacific Basin does not own a single capesize vessel.

Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 25/10/13

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