Featured Report: CIMB Says Dry Bulk Shipping To Fly

CIMB Research had a report on Dry Bulk Sector and they reckon that the sector will fly.

• • We have become more confident that the dry bulk rally has legs for the rest of the year. As freight rates rise, asset values will rise and help lift the valuations of dry bulk shares. Investors should take advantage of the current summer drift in the Baltic Dry Index to accumulate dry bulk stocks. Here are 10 reasons.
  
  • Reason 1: Crude steel production in China is expected to rise 8.2% to hit 540m tonnes as the economic stimulus measures take effect.
  
  • Reason 2: China is expected to continue relying on imported iron ore for the majority of its consumption because the current price premium of imported iron ore over domestic sources is not excessive given the higher quality.
  
  • Reason 3: China’s iron ore inventories at ports are low relative to its increased consumption of imported ore, despite testing previous highs on an absolute basis.
  
  • Reason 4: Brazilian iron ore exports may take off in 2H09 and increase tonnemile demand. With Australian production already at close to full capacity, any further increase in global iron ore demand could draw additional shipments from Brazil and increase tonne-mile demand, thereby boosting dry bulk shipping rates.
  
  • Reason 5: Europe, Russia, Japan and the US will restart blast furnaces as apparent steel demand is higher than the current level of production.
  
  • Reason 6: Growth of property starts in China has finally gone into positive territory, suggesting that demand for construction steel is set to expand.
  
  • Reason 7: China’s demand for and production of flat steel products should also be boosted by continuing expansion of automobile sales and the recent positive trend observed for sales of white goods.
  
  • Reason 8: Steel inventories have declined across the globe while steel prices are rising. These are powerful incentives for steel mills to restart production.
  
  • Reason 9: China and Japan may see higher coal imports in 2H since Chinese electricity production growth is back in the black while Japan’s coal imports should
  start to recover with the expected expansion of industrial production in 2H.
  
  • Reason 10: The idle fleet of bulkers currently stands at just 5% of the total fleet, with the vast majority being ships more than 20 years old. This means that the idle fleet of modern tonnage is just 1%.
  
  • Maintain OVERWEIGHT on dry bulk shipping. We expect this current half year to be very strong for dry bulk shipping for the above reasons. The BDI recently closed at 2,623 points. We expect it to average 4,000 points in 2H09, implying at least 50% upside to the current level and almost double the 1H average of 2,084 points.
  
  • We have OUTPERFORM calls on STXPO, Pacific Basin, PSL and TTA, as valuations remain attractive with upside to the sum-of-parts market value of their fleets. However, Maybulk remains an UNDERPERFORM on valuation grounds.
  
  With the exception of Maybulk, we have raised target prices for all the stocks as we
  factor in the recovery of second-hand vessel values.

Baltic Dry Index closed down yesterday again.

Hmm... Pacific Basin? They just announced their earnings.

• Pacific Basin Shipping H1 Net Income $74.8 Million
  
  MarketWatch Pulse
  
  HONG KONG -- Dry bulk shipper Pacific Basin Shipping Ltd. said Tuesday its first-half net income totaled $74.8 million, or 4.2 U.S. cents a share, compared to $337.6 million, or 20.8 cents a share, a year before. Revenue fell 53% to $425.9 million from $909.9 million. The company declared a dividend of 8 Hong Kong cents a share, compared with 76 Hong Kong cents last year. ( Source: here )

And if you are a Lyold's List subscriber, you would note that Pacific Basin themselves are not bullish on the recovery of the sector at all. Pacific Basin cautious on dry bulk recovery

• THE dry bulk market faces a choppier second half as newbuilding deliveries and uncertainty over the continued commodity boom into China could depress the sector, Pacific Basin Shipping said....

On Steel Guru Slowdown signs - New build ship prices drop despite rise in steel

• Wednesday, 12 Aug 2009
  
  According to Lloyds List, analysts believe the price of Chinese new buildings will continue to decline in the second half of this year despite a 33% surge in the country's steel price between April and June.
  
  The China Iron and Steel Association earlier reported that the country's 71 large and medium steel producers recorded a profit in June for the first time in six months. The association attributed the rebound to producers significantly increasing the price of steel.
  
  Mr Cai Jiangwu Umetal.com steel analyst said that price of medium plate which is used in shipbuilding, jumped from CNY 3,000 per tonne to CNY 4,000 per tonne between April and June. However, China State Shipbuilding Corp research centre analyst Mr Zhang Changtao said the price of new buildings would continue to fall over the next six months despite the rise in plate prices.
  
  He said "The steel price is still hovering at a relatively low level compared with the Yuan7,000 and Yuan8,000 range it was at in early 2008,"
  
  Mr Zhang also noted that the bargaining power of shipyards remained weak. "Shipbuilders are reluctant to transfer the steel cost to their customers. Instead, they are more likely to slash newbuilding prices in face of the weakening demand."
  
  Steel industry analysts said the steel price was unlikely to remain at its current level.
  
  Mr Cai said overcapacity in the Chinese steel industry was at a very serious level as steel factories had significantly boosted production last year. Given the oversupply of steel, producers would not be able to keep pushing up the price.
  
  A spokeswoman for the China Association of the National Shipbuilding Industry predicted new building prices would drop further by the end of the year due to the lack of demand. She said "Most of the ship owners have no intention to extend the size of their fleets."

How now my dearest?

Want to go long in this sector?