Thursday, November 12, 2009

BDI surging to 4000

Baltic Dry Index (BDI) , a measure of dry bulk shipping spot rate, surged 206 points yesterday , bringing the index to 3954. As we have previously discussed in " Dry Bulk Shipping Ready to Sale? " Iron ore negotiations and China growth are two drivers of the surge. COSCO analyst predicted that BDI would reach 4000 before the end of the year. Today certainly made him look like a genius.

The current index of three types of ships: Capeside, Panamax, Supramax stand at 67385, 30430 and 21129 respectively, significantly higher than the "dark age"  a year ago at 4193, 6912, and 5580 respectively. [Click on the diagram to enlarge the view]

The global economic recovery led by emerging markets such as China has definitely lifted the tide but the spot rates are still abysmal compared to its peak in 2008 when Capeside rates could fetch as high as approximately 230,000, a little less than 4 times yesterday's rate. All dry bulk shipping companies, in face of adverse and precipitous economic meltdown, dashed to raise fund by issuing new shares to avert bankruptcy.  Most of the companies had their equity diluted to such an extent that the level of spot rate that yielded jaw-dropping profits in the past will have to go a much longer way in producing the same results.

Another dark cloud that has been overshadowing the industry is the potential huge glut of new ships coming online by 2011.

According to N Cotzias Shipping, the capsize market at the end of September consists of 825 ships of a total of 149 million tonnes carrying capacity. The average age of fleet is 10.6 years.Based on its latest monthly report, N Cotzias said that just 16 capes of 2.8 million tonnes DWT have been scrapped. At the same time, the projected contracted and already under construction vessels that will enter the market until 2016 are 736 units of a total 144 million DWT. Out of these new buildings 429 units, or 80 million DWT are to enter the market by the end of 2010. Until today we only have 25 new buildings capes cancelled of which 9 were to be delivered in 2009 and 12 in 2010.This is a mere 5% only of the total of new ship orders.
Based on this assumption, Cotzias said that that "If we scrap only 2% of the total active fleet and if we cancel only 5% of the total orders, we are mathematically driven to expect that the Capsize market is head on to be over capacitated by 90% to 95% if all current trends prevail during remaining 2009 and 2010."
I remain short-term speculatively bullish in this sector due to near term catalysts such as favorable asset market sentiments, especially to commodities, imminent iron ore negotiations and continued growth in China. For longer term, uncertainty surrounding the sustainability and strength of global growth together with the upcoming glut in ships still have not offered attractive reward/risk profile for this industry.


Jihong said...

Hi coke, I have been following your picks at mitbbs. Thanks a lot!

Do you have a short term target for DRYS?

Also, is it still a good time to load TRIT? What is your target price?

Many many thanks!

coke said...
This comment has been removed by the author.
coke said...

DRYS in the near term is very much dependent on the overall market sentiment.
Assuming that the market can stay bullish till the end of the year. I guess first target will be 7.50-8.50.

TRIT is a niche speculative play on Chinese spending on water. I believe this can continue through 2010 barring a disastrous double dip of the economy. Currently, I still maintain a price target of $24. But due to the small float, the price movement can be very volatile as you probably have seen in the last 3 weeks. I still think it's a buy. but it's not a stock that u want to heavy weight and you will have to be prepared for a 20% pullback with no bad news from the company if the overall market turns south.

Jihong said...

Thanks so much!