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We have become more confident that the dry bulk rally has legs for the rest of
the year. As freight rates rise, asset values will rise and help lift the valuations of dry
bulk shares. Investors should take advantage of the current summer drift in the
Baltic Dry Index to accumulate dry bulk stocks. Here are 10 reasons.
• Reason 1: Crude steel production in China is expected to rise 8.2% to hit
540m tonnes as the economic stimulus measures take effect.
• Reason 2: China is expected to continue relying on imported iron ore for the
majority of its consumption because the current price premium of imported iron ore
over domestic sources is not excessive given the higher quality.
• Reason 3: China’s iron ore inventories at ports are low relative to its increased
consumption of imported ore, despite testing previous highs on an absolute basis.
• Reason 4: Brazilian iron ore exports may take off in 2H09 and increase tonnemile
demand. With Australian production already at close to full capacity, any
further increase in global iron ore demand could draw additional shipments from
Brazil and increase tonne-mile demand, thereby boosting dry bulk shipping rates.
• Reason 5: Europe, Russia, Japan and the US will restart blast furnaces as
apparent steel demand is higher than the current level of production.
• Reason 6: Growth of property starts in China has finally gone into positive
territory, suggesting that demand for construction steel is set to expand.
• Reason 7: China’s demand for and production of flat steel products should
also be boosted by continuing expansion of automobile sales and the recent
positive trend observed for sales of white goods.
• Reason 8: Steel inventories have declined across the globe while steel prices are
rising. These are powerful incentives for steel mills to restart production.
• Reason 9: China and Japan may see higher coal imports in 2H since Chinese
electricity production growth is back in the black while Japan’s coal imports should
start to recover with the expected expansion of industrial production in 2H.
• Reason 10: The idle fleet of bulkers currently stands at just 5% of the total fleet,
with the vast majority being ships more than 20 years old. This means that the idle
fleet of modern tonnage is just 1%.
• Maintain OVERWEIGHT on dry bulk shipping. We expect this current half year to
be very strong for dry bulk shipping for the above reasons. The BDI recently closed
at 2,623 points. We expect it to average 4,000 points in 2H09, implying at least 50%
upside to the current level and almost double the 1H average of 2,084 points.
• We have OUTPERFORM calls on STXPO, Pacific Basin, PSL and TTA, as
valuations remain attractive with upside to the sum-of-parts market value of their
fleets. However, Maybulk remains an UNDERPERFORM on valuation grounds.
With the exception of Maybulk, we have raised target prices for all the stocks as we
factor in the recovery of second-hand vessel values.
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