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This article first appeared in The Edge Malaysia Weekly on December 11, 2017 - December 17, 2017

DRY bulk shipping rates have bounced back this year, with the Baltic Dry Index rising 74% to 1,670 points last Friday. Dry bulk rates between the US and Asia too have largely been increasing over the last one year.

With the Baltic Dry Index — which tracks the cost to transport various raw materials by sea — continuing its rise from 1,328 points on Oct 2 to 1,670 on Dec 6, things could be looking up for the country’s largest bulk carrier, Malaysian Bulk Carriers Bhd (Maybulk).

Investors have taken notice, sending its share price up by 16.31% this year. The counter reached an intraday high of 95.5 sen in April and touched 93 sen on Nov 9.

Higher dry bulk freight rates have indeed had a positive impact on Maybulk’s top and bottom lines. The dry bulk carrier has been able to increase its revenue and narrow its losses over the nine-month period ended Sept 30, 2017 (9MFY2017).

During the period, Maybulk’s revenue increased by 24.6% to RM201.06 million while its operating loss shrank to RM10.9 million from RM58 million a year ago.

According to its website, the carrier operates four post-Panamax, seven Supramax and six Handysize bulk carriers.

“As at the beginning of December, generally, the level of dry bulk freight rates is sufficient to cover opex and capex of owning a dry bulk vessel and providing decent returns,” says Oscar Tjakra, senior analyst of food and agribusiness at RaboResearch.

RaboResearch is a unit of Rabobank, a Dutch multinational banking and financial services company serving the food and agricultural industry.

“[Its] Capesize vessels have been in profitable territory since August, while the Panamax vessels have been in profitable territory since September.

“One thing to note is that every company operates differently, hence the level of profitability will be different for each company. Also, seasonal factors will still affect the movement of dry bulk freight rates,” says Tjakra in an email response.

In a November report on the impact of rising freight rates on the global grain and oilseed trade, Tjakra says dry bulk time charter rates are forecast to increase between 10% and 20% year on year in 2018 and 2019 due to lower dry bulk vessel supply growth. “[The] low freight rate environment in recent years reduced vessel owners’ interest in ordering new vessels. The current order book shows that new building deliveries for 2018 will be down 43% year on year and 28% year on year in 2019.”

Tjakra says dry bulk carriers should have better returns in 2018 and 2019 as average time charter rates are expected to be better than this year’s, thanks to better utilisation levels.

“If dry bulk freight rates — both charter and spot — continue to increase in the coming quarters, Maybulk could turn the corner and post its first net profit since 2014,” says a stock market trader who deals in Maybulk shares.

However, further analysis should be done on Maybulk’s operations to gauge the extent of its benefits from rising dry bulk rates. For example, not all trade routes are doing better now than a year ago.

While the spot rate for Panamax vessels carrying commodities such as corn and cotton from ports in the Pacific Northwest (PNW) to Japan has increased by 26.5% over the last one year to US$24.67 per tonne, the rate for the same vessel sailing from PNW to Southeast Asia remains about the same compared with a year ago — US$29 per tonne.

Supramax vessels carrying commodities from PNW to Taiwan get paid 27% more currently at US$31.90 per tonne compared with a year ago, but the same vessels going to Southeast Asia from PNW get US$35.60 per tonne, 4% less than a year ago.

(All prices are provided by Commodity3, which provides its clients with calendar term structures derived from values of futures markets, as well as physical prices and their historical time-series, through Bloomberg.)

In its 2018 outlook report on global shipping published in Dec 5, Fitch Ratings says it does not expect a material improvement in the market fundamentals for the global shipping sector next year due to the lingering overcapacity.

However, a moderate increase in dry bulk volumes of 2.7% expected in 2018, coupled with low vessel supply growth of 1.2%, should provide support for dry bulk freight rates, says the rating agency.

“The overcapacity in shipping undermines the current rebound in dry bulk and container shipping rates and puts in doubt its longevity. Only prudent capacity management could reverse sector fundamentals, leading to a sustainable recovery in freight rates,” says one of the authors of the report, Angelina Valavina, senior director of Fitch Ratings.

For 9MFY2017, Maybulk reported a net loss of RM60 million, compared with RM96.7 million in the previous corresponding period. Revenue from its bulkers increased to RM185.68 million, compared with RM114.14 million last year.

The segment’s loss before tax decreased to RM21.7 million in 9MFY2017, compared with RM85.5 million a year ago, due to improvements in time charter rates.

According to Maybulk, its dry bulk charter rates increased to an average of US$7,715 per day in 9MFY2017, a 55% increase from the previous corresponding period’s US$4,969 per day. However, the hire days were less during the period at 4,962 days compared with 5,274 days last year.

In its latest quarterly financial report, Maybulk says while the board is encouraged by the improving dry bulk market, it remains concerned about the depressed offshore services segment and its overall impact on the group’s performance.

This business is undertaken by its 21% associate, PACC Offshore Services Holdings Ltd (POSH), which is listed on the Singapore Exchange.

For 9MFY17, POSH reported a higher attributable loss of US$37.248 million compared with US$26 million a year ago, mainly due to lower charter rates and utilisation across its major business segments.

Maybulk booked a loss of RM34.607 million from POSH in 9MFY2017 compared with RM22.671 million in 9MFY2016.

“Offshore oilfield development capital expenditure remains subdued and demand for all categories of offshore vessels remains weak. This will continue to exert significant pressure on charter rates and vessel utilisation and have a negative impact on POSH’s financial performance in the next few quarters. Under these circumstances, POSH will reassess the carrying value of its fleet and goodwill and further impairments are expected.

“While the amount is yet to be determined, this will have a material adverse impact on POSH’s financial results in 4QFY17 and the 12 months ending Dec 31, 2017,” Maybulk says in its financial statements. It added that it will have to similarly account for the impairments. This is expected to materially impact the group’s results.

In the end, while the dry bulk segment may continue to improve, Maybulk’s overall performance will be hampered by the bleeding at POSH.

 

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