Tuesday, January 08, 2008

Regarding the Dry Bulk Shipping Sector.

I was reading Blogger Kirk's daily report, Time's A Wastin, when I found this very interesting link posted by Kirk: "Much can be learned from understanding sentiment cycles. Teresa Lo studies the dry bulk shipping industry".

I like that posting by Teresa Lo a lot.

In her article, she focused on 2 phases of the Sentiment Cycle.

  • The two phases we’ll focus on is Enthusiasm and Disbelief:

    Once it is widely accepted that economic and corporate fundamentals are supporting higher prices, a bell goes off. The bull survived The Big Dip. Those who had previously been afraid now have plenty of reasons –- and proof -– that it is safe to go back into the market and buy again.

    At this point, we detect a subtle change in psychology, a shift from the fear of loss to the fear of missing out, and the appetite for risk becomes evident. Investors buy on faith, bolstered by analyst and media reports projecting the trend to continue. As price rises to new highs, they all scream, “It’s a breakout!” They are supremely confident that the best is yet to come.

How true isn't it? The fear of missing out!

Teresa then starts her report on the dry bulk shipping sector by stating the following:

In October 2007, stories by the financial media regarding Dry Bulk Shipping were overwhelming bullish. Let’s check the headlines:

  • Cramer’s ‘Mad Money’ Recap: Bulk Up on Dry Bulk ShippersNobody talks about dry bulk shipping stocks because they’re boring. “I can’t throw pies or wear funny clothes when I talk about dry bulk shipping,” Cramer said. The money to be made on these stocks, however, is very exciting; they provide “huge and reliable dividends,” he said. Dry bulk shipping stocks have risen enormously since July, when Cramer recommended them. “This industry is one of the great bull markets in the world right now,” he said. Even though investing in these stocks is “not sexy,” sometimes you have to go for the easy money, and that’s what dry bulk shippers offer.
  • Jefferies ups targets on bulk carriersOct 16 (Reuters) -Jefferies & Co raised the price targets on several shipping companies, saying the outlook for the dry bulk shipping market remains attractive as significant quantities of new iron ore production capacity come on-line over the next 12 months.
  • Bear upgrades U.S. ocean shipping sectorOct 10 (Reuters) -Bear Stearns upgraded the U.S. ocean shipping sector to “market weight” from “market underweight,” saying it was positive on dry bulk fundamentals over the next 6 to 18 months.”
  • Bear upgrades U.S. ocean shipping sectorOct 10 (Reuters) -Bear Stearns upgraded the U.S. ocean shipping sector to “market weight” from “market underweight,” saying it was positive on dry bulk fundamentals over the next 6 to 18 months.”
  • Smiling Dry-Bulk Shippers See The Boom Times Lasting For Years- Investors Business Daily, September 28, 2007

Now obviously this case study would be interesting as there are a number of dry bulk shipping stock listed locally.

And in this very same period, Oct 2007, Star Biz carried the following article: Shipping stocks head north

  • PETALING JAYA: Shares in shipping firms rose yesterday as freight rates for dry commodities like coal, iron ore and grain climbed to a new high.
    Shares in Malaysian Bulk Carriers Bhd, which derives 70% of its business from dry-bulk shipping, ended 4 sen higher at RM4.80 yesterday while smaller sized Hubline Bhd gained 1.5 sen to 76.5 sen in active trade of 8.18 million shares.

Teresa then states her second phase:

  • Disbelief
    The market fails to go higher, and indeed many of the early leaders have broken down under the 50-day moving average, giving technicians the Subtle Warning. This marks the beginning of the ‘something is not right’ gut feeling, but in the absence of bad news, investors hold on to hope. Not only are they heavily invested in the market, they are psychologically invested in being right and they ignore anything that does not go with their worldview. Indeed, they even wonder aloud why their beloved stocks cannot go up amidst good news, higher earnings guidance and analyst upgrades.

How true isn't it? Tersea then states:

  • Almost all of the high fliers in the Dry Bulk Shipping industry have pulled back from their highs. Investors are looking around for hopeful articles. The “handholding” phase has begun. A excellent example is the industry review piece from Barron’s that also focused on specific companies. They worked the analysts and company executives for quotes and even did a video interview with Bear Stearns shipping analyst Scott Burk:

    Dry-Bulk Shippers Are on Sail
    DRY-BULK-SHIPPING STOCKS HIT SOME ROUGH seas late last year, but barring a U.S. recession and global slowdown, they should be in for smoother sailing in 2008. While companies across the sector are poised to benefit, two standouts are Diana Shipping and Genco Shipping & Trading. Both shippers will acquire new vessels and will have the opportunity to lock in higher contract rates this year. That would provide the company and investors with reduced earnings uncertainty despite an iffy economic outlook. After roughly tripling from their lows in early 2007 to their peaks at the end of October, Diana and Genco..”
    Video Interview- Scott Burk Bear Stearns shipping analyst

She then provides 8 charts for 8 different Bulk shipper.

I will just reproduce one of them here.

Now here is the interesting exercise. Let's compare with some of our Bulk Shipping stocks.

1. Maybulk.

2. Swee Joo.

3. Hubline.

Compare these 3 stocks with the stocks Teresa had posted in her reserach.


Did you see how they all 'seemed' to have formed a peak on Oct 2007?


Ah... I do not give investment advice. Hence, perhaps, you might want to give the rest of Teresa article a read here!

ps. On Dec 31st, the following article was posted on Star: Container, dry bulk seen on downtrend

  • Container, dry bulk seen on downtrend


    THE container and dry bulk shipping industry is forecast to trend downwards next year due to anticipation of weaker Asia-to-the United States trades amid a situation of supply exceeding demand.

    Citi Investment Research (Asia-Pacific), in its latest transportation outlook report, said global TEUs (twenty-foot equivalent units) were expected to see a 9% growth next year from 10% this year.

    “This is based on some deceleration in Asia-Europe outbound trades and continued softening in Asia to US trades,” it said.

    The research house said for Asia to US trades, Transpacific remained the most important market in the world and “it has not been doing well”.

    “Behind a marketing push by container liners on pricing, carrier executives have talked openly of slashed capacity and flat volumes,” it said.

    It said the volumes to the US West Coast fell short of this year's forecasts, which originally called for 10% growth. It was downgraded at 7% to 8% and recently, at 2% to 5%.

    “Based on current data, growth is about 2% to 3%,” it said.

    On the positive side, shipping lines made customers pay for higher inter modal pass-through charges.

    “Also, the generous capacity cuts by prominent shipping group Maersk helped the market, to an extent.

    “Maersk, in late 2006 and early this year, took out about 20% of its capacity from this trade,” it said.

    Citi Investment said the Transpacific rates in the second half this year remained several percentage points below last year's despite higher fuel and other costs.

    “We believe next year will follow a similar deterioration trend due to weaker demand and lower rates from the US property bubble,” it said.

    It added that the third quarter of this year all-in rate on the Transpacific Eastbound was lower by 0.5% at US$1,707 per TEU.

    “This rate includes the higher fuel costs, which the container lines will try their best to redress next year.

    “We believe 2008 will be another difficult year despite news that CSCL shipping line has joined the Transpacific Stabilisation Agreement (TSA) that now represents about 80% of capacity in the Transpacific Eastbound,” it said.

    TSA is a research and discussion group of major container shipping lines, offering ocean and inland transportation, logistics and supply chain services from Asia to the US.

    To counter the downturn, the research house said, the Asia-Europe trade combining the North Europe and the Mediterranean, was expected to be the world's largest trade by box volume next year “if the Asia to Europe trade grows more rapidly to the US”.

    “Given the run rate of growth has been at 20% or above this year, congestion is feared in many North Europe ports.

    “In August and September, overall growth slowed to about 16% to 17%, and base case growth can still be expected to hold at 15% next year,” Citi Investment said.

    Interestingly, it said, the real driver of trade growth was strong demand from Europe for China-made goods.

    “Growth into the Mediterranean has been even stronger than North Europe, partly because of growth into the Black Sea area,” it said.

    For dry bulk, the research house forecasts that supply would exceed demand by end 2008 due to increased capacity.

    “Near-term deliveries continue to creep up due to off-the-radar ship orders being completed.

    “Weaker tanker rates and the phasing out of single hull tankers have resulted in many ship owners converting their tankers into carrying dry bulk. This creates a surplus in capacity,” it said.

    Citi Investment said the latest Clarkson numbers for bulk deliveries next year would be 29.1 million dead weight tonnes (dwt).

    “Oil tanker conversions threaten to add another 7 million dwt next year, which can bring total supply growth in 2008 to almost 9%, before accounting for potential scrapping of old vessels and order book slippage,” it said.

    “Still, we are weary of putting too much hope on slippage, since we expect 2008 deliveries to continue creeping upwards,” it added.

    Although the supply and demand situation may be debatable in terms of where it would take the dry bulk market, the research house expects it would be down.

    “Bulk capacity will hit at 9% to 10% growth levels like we have never seen before.

    “Total demand growth, including special factors such as congestion and demand growth for long haul will have to accelerate from its recent China-driven, all time high levels to keep pace with supply,” Citi Investment said.

    It said demand growth seen from the China-driven growth since 2003 to date had been only 7.24% per year on average and on a longer-term, demand had only grown 3.4% per year from 1980 to 2007.

    “Also, if one believes the growth in China will slow down, then one will be hard-pressed to show how demand can overcome the current order book,” it added.

    Nevertheless, it said, bulk stocks could have one more phase of bullish market next year though downside risks could be on the rise as the year progressed.

    On shipping stocks, the research house, which has an “underweight” call on the shipping sector, has rated a “hold” on shipping companies Wan Hai and Precious.

    It is maintaining a “sell” call on CSCL and Hanjin based on their high valuations.