Maintain neutral: We expect the recovery in Baltic Dry Index (BDI) rates to be more sustainable towards end of FY14, driven by the seasonality factor and possibly higher 2H14 iron ore shipments by Vale International SA.
The Baltic Dirty Tanker Index (BDTI) rates eased towards end of August, albeit well above levels seen in 2Q14. We expect the tanker rate to improve again during the winter period.
Dry Bulk Shipping: The performance of dry bulk market had been subdued in the second quarter of 2014 (2Q14). Among the contributing factors were lower trade demand growth by reduced coal shipment to China and Europe, and impacts of the Indonesian ban on bauxite and nickel ore exports. Year-to-date, the dry bulk fleet expanded 4.6% year-on-year (y-o-y) to 739 million deadweight tonnage (DWT), with the forecasted growth of more than 5% y-o-y by end of 2014 (source: Platou). Driven by the seasonality factor and possibly higher 2H14 iron ore shipments by Vale, we expect the recovery in BDI rates to be more sustainable towards end of FY14.
The largest type of dry bulk vessels, capesize, which is designed for hauling iron ore, earned the highest freight rate, with the average spot time charter equivalent (TCE) of US$13,800 (RM44,213) per day in August 2014, while the freight rate for Panamax was the worst performer, at a mere US$5,800 per day. Due to correlation and substitution effects, the weak Panamax rate dragged down both, the Supramax and Handysize rates, to trade below US$10,000 per day.
As of Sept 5, the benchmark pricing of imported iron ore dropped to a four-year low at US$83.6 per tonne. Taking advantage of the falling price of seaborne iron ore, China’s iron ore imports surged 18.8% y-o-y to 235 million tonnes in 2Q14. The weekly total inventory level of iron ore at China’s port reduced slightly to 10.2 million tonne as of August 29 from the recent high of 10.7 million tonne as of June 20. This would last for 4.3 days of the import demand.
As such, the abundant supply of cheap iron ore and steady steel demand should support the capesize freight rate.
Tanker Shipping: China’s shipping industry, which comprises around 240 firms, carries only 25% of the nation’s total trade and lags behind other foreign players such as A P Møller-Maersk, CMA-CGM SA, MSC and so on. Under the new policy, China will introduce tax reform and other regulatory measures to push shipping firms to modernise their fleets. The government would encourage firms to retire their older fleets, thus reducing available vessel supply. This should bode well for the recovery in freight rates.
Over the 4Q13 to 1Q14 period, the severe winter in the North America sparked the rally in the BDTI. Subsequently, the index retreated to its year-to-date lowest point of 630 (as of 20 January) from its year-to-date (YTD) highest point, 1,344 (as of 5 June). Nonetheless, the index surged 51.6% to 955 points (as of July 22) from the YTD lowest point.
This second rally was attributable to the combination of factors, namely: (i) threat of supply disruptions from the unrest in Iraq; (ii) summer seasonal refinery maintenance finishing earlier than usual and (iii) record-high crude oil inventories in the US gulf which resulted in a shortage of onshore storage capacity. For July to August 2014, very large crude carriers and Aframax tankers’ average TCE improved to above US$20,000 per day from the previous 2Q14’s weak average TCE of US$10,000 per day to US$20,000 per day. The Suezmax freight rate was more volatile with average TCE of US$31,500 per day but ended on a weak note at US$19,300 per day in August. Overall, the tanker freight rates eased towards end of August. We expect the tanker rate to surge again during the winter period.
Thanks to the boom of domestic shale oil production; the US is the third largest global crude oil producer today. Should US lift the four-decade-old export ban, it will help the country to realise its growth potential for crude oil production as well as redraw the landscape of global oil transportation.
We maintain our “Neutral” stance on MISC Bhd with unchanged target price (TP) of RM6.53. Reiterate our “Buy” stance on Malaysian Bulk Carriers Bhd or Maybulk with unchanged TP of RM2.02. — MIDF Research, Sept 10
This article first appeared in The Edge Financial Daily, on September 11, 2014.