Barrons piece has a "fresh quote" on Baltic Dry Index (Baltic Freight Index) ..............
(It is (of course) still down sharply from recent peak. But, since this contradicts the current inflation hysteria, one almost never hears about it ...)
Jon.
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MONDAY, NOVEMBER 14, 2005
COMMODITIES CORNER
Shippers To Sink ?
By FEIWEN RONG
BUYING AND HOLDING ships between 1975 and 2002 produced virtually nil return on capital. Not surprisingly, few shipping companies went public during that time and those already listed were ugly ducklings.
Since 2002, things have changed significantly. For example, the average tanker company's earnings before interest, taxes, depreciation and amortization have increased a whopping 234%, as shown by Nordea Bank data. Such a windfall has attracted investors eager to bet on a shipping boom, driven by the rapid industrialization of China and India and their thirst for raw materials.
But, with freight rates down from their 2004 peak, and the industry having issued nearly $5.4 billion in new stock this year, equity investors have become a lot harder to please, says Andreas Vergottis at London-based Oceanic Hedge Fund.
From New York to Singapore, initial public offerings for shipping companies either failed to price within their initial ranges or sank on their debuts in October. Some companies, such as Greek tanker operator Golden Energy, were forced to withdraw its IPO plans due to tepid interest.
The volatile shipping sector seems, for the moment, to have lost momentum. The Baltic Dry Index, a barometer of the cost of moving dry-bulk cargoes around the world, fell as low as 1,750 in July from a record high of nearly 6,200 in December 2004.
The index since has rebounded to 3,300, but shipping stocks have been poor performers. Investors have become more concerned about China's growth, and the possibility that the rapidly expanding supply of fleets will exceed demand, says Matt McCleery, president of the Stamford, Conn.-based consulting and publishing firm Marine Money International.
The windfall profits in 2003-05 are certainly hard to repeat, but analysts say demand and supply will be tightly balanced to ensure ship owners decent profits in the next two years. In the oil-shipping sector, total shipping demand, measured by ton-miles or volume times distance, is estimated to grow by 5.4% in 2005, before slowing to 2.7% in 2006, says the Oslo, Norway-based research firm Fearnleys.
However, time-charter rates for tankers are expected to remain fairly stable or increase somewhat through the remainder of this year, before softening by 15% to 20% through 2006. Tanker fleets are projected to grow by 6.8% this year and 4.9% next year.
In dry-bulk sector, total ton-miles are likely to grow by 5.2% in 2005 and 4.6% in 2006. Dry-bulk fleet growth, meanwhile, is pegged at 6.8% in 2005 and 4.9% in 2006, before slowing to 3.3% in 2007.
Long-term time-charter rates for all sizes in the dry-bulk market are expected to soften by 20% to 25% until the middle of 2006, mostly for Panamax vessels. A recovery is expected in second half of '06, with rates up moderately for all categories of dry-bulk ships, partly reflecting the modest fleet growth foreseen in 2007, says Jarle Hammer, chief economist at Fearnleys. "Although rates have come down for bulk carriers, they shall be more than enough for ship owners to make decent profits," he says.
Equity investors should pick stocks with care, however. "I am reasonably bullish on freight rates, mainly because the Chinese economy isn't slowing down. With large crude-oil flows due to the high price level, and heavy grains output this year, there will be enough bulk commodities moving around later on," says M.J. Coleman, managing director at Singapore-based Aisling Analytics, which manages the hedge fund Merchant Commodity Fund.
"But traditional ship owners are in this [business] to make money from trading assets," Coleman adds. "The good ones trade at asset cycles, buying ships at the lows on mortgages, in a way that is analogous to property developers, with the freight rates providing the rental income. So potential equity investors would be wise to ask themselves: If these smart guys now choose to sell, is it a sign of [the] market topping?"
CRUDE-OIL FUTURES hit a four-month low as rising inventories and a slowdown in demand growth weighed on prices. Nymex December crude settled at $57.53 a barrel Friday, down $3.05, or 5%, from a week earlier.
FEIWEN RONG is a Dow Jones Newswires reporter in Singapore.
E-mail: feiwen.rong@dowjones.com
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