BNP百富勤：中国运输行业--水运2009年2月

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BDI rally, is it sustainable?
We don’t think so, for all these reasons:
• Iron-ore suppliers are pushing up Baltic Dry Exchange (BDI);
• Bulk-vessel order book makes up 71% of the world’s existing bulk
fleet. Expect 9.4% y-y bulk-fleet growth vs 3.9% demand decline in
2009. We expect 8% and 18% of bulk fleet to be idle in 2009 and 2010;
• Bulk shipping supply lacks self-discipline. Any upside above cash
cost breakeven level (BDI 1,000) is not sustainable in an oversupplied
market.
Iron ore drives recent rally
Iron-ore shipping heavily influences the BDI. A high BDI will push up the
iron-ore import spot price in China, which will increase the bargaining
power of contract suppliers’ negotiations (such as BHP and Vale) in
2009. Subsequently, iron-ore suppliers increased their shipment orders
significantly in the past two months, which triggered the recent strong
BDI rally. Among the Capesize bookings related to iron-ore shipments to
China, the iron-ore suppliers’ market share increased to 73% in January
2009, from 38% in October 2008. This factor will disappear after iron-ore
negotiations are complete.
Supply is the dominant risk
The bulk shipping industry is facing a large new vessel delivery in the
coming years. By the end of 2008, the bulk order book accounted for
about 71% of the world’s existing bulk fleet. Assuming aggressive order
cancellation (25% of total order book) and old vessel scrapping (16m
DWT in 2009 vs 0.4m DWT in 2007), we still expect the bulk fleet to
increase 9.4% y-y, to 461m DWT in 2009, the strongest growth since
2000. With the same cancellation and scrapping assumptions, current
order books will push up bulk fleet size to 531m DWT (or 15.1% y-y
growth) in 2010.
Demand recovery lag behind steel & coal
Historically, iron-ore and BDI demand recovery lags steel demand
recovery by six-to-12 months. Assuming strong support from China’s
stimulus package, we expect China’s steel demand to decline 1% y-y
and coal to decline 10% y-y in 2009. We expect bulk shipment demand
will also decline by 3.9% y-y in 2009. So we estimate 8% of the bulk fleet
will be idle in 2009 and 18% idle in 2010.
Bulk shipping is a fragmented market
We believe there will be an oversupply of bulk vessels in 2009. The top
five players only account for 15% of the market share in bulk shipping. In
such a fragmented market, all players are price-takers and shipping
rates won’t stay above the cash cost for long. We estimate BDI 1,000 is
the breakeven level for Capesize vessels’ cash cost, and the recent rally
will end if all idle vessels become operational. We forecast a full-year
average BDI of 1,500 in 2009. Without a sustainable BDI rally, China
COSCO’s earnings will remain weak. The impact on China Shipping Dev
will be less, with 10% net exposure to BDI. Maintain REDUCE for both.

Contents
BDI outlook ...................................................................................................................3
Recent BDI rally – an iron-ore suppliers’ play 3
Supply growth is the major risk 5
Demand recovery lags steel and coal 7
Bulk shipping is a fragmented market 8
Financial statements.................................................................................................... 10

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