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May 19, 2009

Dry bulk shares trade higher

Dry bulk shares were trading higher today after Dahlman Rose & Co: said it was "growing more positive on the outlook for the dry bulk shipping industry"

The firm said it "had turned negative last summer due to declining global steel demand and its inevitable impact on the dry bulk market."

In recent weeks, says Dahlman Rose "market dynamics have been shifting more positively in recent weeks. Firming Chinese steel prices have spurred Capesize rates, which have jumped to over $35,000/day. Government stimulus has supported the Chinese steel industry, which has continued at a world-leading pace, to the point that Chinese steel production now accounts for nearly half of the worldwide total versus one-third last year. Dry bulk carries substantial leverage to an improvement in steel demand outside China, which seems likely during the second half of 2009."

Dahlman Rose notes that "increased thermal coal imports into China have supported the Panamax market. In April, 30 spot Panamax cargoes were fixed from Australia to China, and the first half of May is maintaining an equivalent pace. Although the 2.1 million tons represented by the monthly fixture activity is a small portion of China’s 200 million ton monthly production, the total represents a significant ramp up in Pacific trade when examined against the average monthly Australia-China fixture total of less than 2 in 2008. As a result, Panamax rates have seen significant support, firming to the highest levels since last September above $20,000/day and spurring increased time charter activity."

"We believe ship values are set to increase on the recent strength in charter rates," says the firm. "Based on implied returns from current spot rates, we believe dry bulk vessel values could see increases of 20%, with additional increases possible should the firming continue. Such a move would have a significant impact on the highly-levered structures of many within the dry bulk group, and would lead to much higher equity valuations. More importantly, companies would be in a much stronger position with respect to loan-to-value covenants which would allow substantial flexibility to managements."

"While Chinese iron ore inventories have increased in recent weeks," says Dahlman Rose, "we do not believe current levels are excessive. Iron ore stockpiles currently stand above 70 million tons, which is higher than the 58 million tons earlier this year, but we believe an increase is appropriate considering monthly Chinese steel production has increased to 45 million tons from 40 million tons at the start of the year. On a year-over-year basis, steel output is flat while inventories stand roughly 6 million tons higher. Considering monthly iron ore consumption is currently running at 70 million tons, the difference versus last year does not seem excessive."

Dahlman Rose is raising its rate forecasts for the second half of 2009 and for 2010. "Our 3Q09 Capesize, Panamax and Supramax rate forecast has increased to $35,000/day, $20,000/day and $17,000/day and our 4Q09 and 2010 forecast are now $40,000/day, $25,000/day and $20,000/day respectively. While the increase in earnings potential for the dry bulk group supports equity valuations, we believe a more important issue is the potential return to compliance with prior debt covenants on improving vessel valuations."

The firm this morning said it had:

upgraded Diana Shipping (DSX) to Buy from Hold and target $20 based on 8x 2010 EBITDA

upgraded Eagle Bulk (EGLE) to Buy from Hold and target $10 based on 8x 2010 EBITDA

upgraded Genco Shipping (GNK) to Buy from Hold and target $28 based on 6x 2010 EBITDA

upgraded Paragon Shipping (PRGN) to Buy from Hold and target $7 based on its year-end NAV

upgraded Safe Bulkers (SB) to Buy from Hold and target $10 based on 6x 2010 EBITDA

upgraded Star Bulk (SBLK) to Buy from Hold and target $8 based on 6x 2010 EBITDA

The firm said that it maintains DryShips (DRYS), Golden Ocean (GOGL), Navios Maritime (NM) and TBS International (TBSI) at Hold

It upgrades Excel Maritime (EXM) to Hold from Sell


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