More update on the dry bulk sector.
Posted on Reuters:
- India dry bulk shippers brace for rough sail ahead
By Swati Pandey
MUMBAI (Reuters) - Dry bulk shippers in India are scrambling to put their vessels on long-term contracts and defer new orders on fears a slump in charter hire rates will bite into their earnings this year and beyond, officials said.
The Baltic Dry Index, a gauge of shipping costs for commodities, has fallen more than 90 percent to a little over 800 points from a peak of 11,793 points in May.
Several dry bulk carriers have been sitting idle for days as poor demand has taken a toll on shipments, which have fallen over 90 percent from a year ago, analysts said.
"The scenario is a lot more painful as far as dry bulk is concerned. There is a significant impairment on earnings," Bharat Sheth, Managing Director of Great Eastern Shipping, which has 11 bulk carriers, said on a conference call last week.
Officials were also concerned about renewal of contracts, as there were no takers for long-term covers and rates were abysmally low.
Average earnings on vessels in the spot market are seen falling by 70-90 percent, Sheth said, adding he would immediately shift spot vessels to term contracts if the pricing was suitable.
On the contrary, offshore and oil tanker segments were still healthy, though rates have softened by nearly half since the peaks seen early this year.
Firms that placed orders for dry bulk vessels over recent months, when freight rates were climbing steadily, have now deferred them as the sector does not look lucrative anymore.
A dry bulk carrier moves unpackaged cargo such as grain, coal, ore and cement, demand for which has significantly dropped due to a global economic slowdown and tighter trade finance.
However, Essar Shipping Port & Logistics was largely insulated from the slump, a top official said, as 80 percent of its bulk carriers were on long-term contracts. Still, it has deferred acquisitions due to poor market conditions.
The company had planned to buy three carriers this year.
"Because of demand getting shrunk and new supplies (vessels) getting in, the dry bulk trade is declining. Throughput itself has shrunk considerably," said Divyanshu Tambe, analyst at I-maritime Consultancy.
Throughput is a measure of the number of vessels or containers handled by a port over a period of time.
ROUGH SEAS AHEAD
Analysts widely expect profits at dry bulk shippers to slip significantly in FY09 and the year after, while those that have not secured firm contracts may even turn in losses.
Dry bulk segment comprise an average 25 percent of shipping companies' revenues.
Most shippers posted a spectacular jump in quarterly profits for July-September, buoyed by strong charter hire rates in earlier quarters and income from new vessels.
"What we saw - quarter two - will be the best quarter in terms of numbers for years to come. In the coming quarter, Mercator Lines will take the biggest hit in profit, followed by SCI," a Mumbai-based analyst said.
Mercator Lines owns and controls 12 dry bulk carriers while state-run Shipping Corp of India has 20.
"At least 1-½ years from now on... till FY10 will be bad for these companies. It will be a while before we come out of it," I-maritime's Tambe said.
Issues to consider.
1. Several dry bulk carriers have been sitting idle for days as poor demand...
2. .. no takers for long-term covers and rates were abysmally low
3. .. offshore and oil tanker segments were still healthy
4. Firms that placed orders for dry bulk vessels over recent months.. have now deferred them as the sector does not look lucrative anymore. - this is a massive, massive concern for dry bulk vessel builders, yes?
5. Analysts widely expect profits at dry bulk shippers to slip significantly in FY09 and the year after, while those that have not secured firm contracts may even turn in losses. - expect losses!
And the following article on FT.com highlights the potential massive losses due to derivatives! Yes it would appear that even shippers uses derivatives!
- Wave of losses looms for shipping industry
By Robert Wright in London
Published: November 4 2008 02:00 Last updated: November 4 2008 02:00
Fears are growing in the shipping industry over the potentially big losses that could emerge this week on derivatives triggered by the October collapse in rates to charter dry bulk ships.
Since short-term dry bulk charter rates plunged 71.9 per cent in October, traders and shipowners have worried that traders might be caught out by the speed and severity of the fall.
Traders in forward freight agreements - derivatives based on short-term charter rates - could owe significant sums if they were betting on a rise in charter rates for ships carrying coal, iron ore and other commodities.
The sector's Baltic Dry index of charter rates started the month at 3,025 points and closed on Friday at 851. The 80 per cent of trades made through clearing houses were being settled yesterday, while traders who bought cash-settled products through private transactions, known as over-the-counter trades, have until Friday to settle.
The many shipowners participating in FFA markets could also face losses if their market positions went beyond simply covering the market exposure of their actual ships.
London-based, New York-listed Britannia Bulk, which has been hit by its exposure to speculative FFA trading, put its British operating subsidiary into administration on Friday. It is the first quoted shipping company to suffer such a blow during the current downturn.
Duncan Dunn, senior director in the futures division of London's Simpson, Spence & Young shipbrokers, said the market's very rapid fall would have left anyone betting on upward movements needing to make substantial payments. "If they're under strain, then that's only going to increase their problems," he said.
Market participants' concerns have been heightened by the possibility of knock-on effects from failures of investors affected by FFA market losses.
If investors facing FFA market losses hand back ships they had chartered early to owners, the ships' owners will earn considerably less than they expected. They could face problems servicing debt related to the ships.
Michael Bodouroglou, chief executive of Paragon Shipping, a Nasdaq-listed dry bulk shipowner, said that, even if a company had not participated in FFA trading itself, counterparties such as ship charterers might have done so. "Company failures may cause a domino effect," he said.
However, there is is one optimistic dry bulk shipper!
- There are rough waters ahead for shippers, but DryShips is looking for opportunities and George Economou, the company's controversial chief executive, is confident he will weather the storm.
On Monday the company posted a 71% spike in third-quarter profit, boosted by increased freight rates, though its earnings missed analysts’ expectations.
Cantor Fitzgerald analyst Natasha Boyden said the company fell short of the Street’s forecasts primarily because of increased general and administrative expenses of $25.9 million, higher than her estimate of $10.5 million. Its operating expenses for its ocean drilling rig unit was $40.9 million, versus Boyden’s forecast of $27.6 million.
Given the uncertainty in demand, Boyden is concerned over DryShips' substantial spot market exposure for 2009, which Boyden estimates at 41.0% of its vessel days.
Nonetheless, Economou’s optimism rubbed off on investors, who sent the company's stock soaring 14.0%, or $2.69, to close at $21.94. DryShips shares have tumbled 71.8% since the beginning of the year. Greek shipping billionaire Economou has been criticized for running DryShips, a pubic company, as if it was private.
The global credit crunch has punished the shipping industry, with virtually no vessels on spot charters moving. That's a sign that the frozen credit markets and worries about economic growth have stifled commercial activity.
But Economou said he expects the situation to improve as commodity stockpiles are drawn down and financing thaws out. Meanwhile, the credit crisis has delayed delivery of new freighters, since buyers can no longer get financing, and that benefits DryShips, which, Economou said, has a large enough fleet to keep up with reviving demand. DryShips announced last month it plans to take over 9 Cape-size ships that had been owned by Economou’s privately held Cardiff Marine.
Economou said DryShips is also strong financially, with cash of $456 million and another $1.2 billion of available capital from bank lines, for total liquidity of $1.6 billion. But DryShips has the most outstanding debt in the sector and its total debt has shot up 131.3% over the prior year.
DryShips patted itself on the back on Monday for shifting its chartering strategy prior to the recent bloodletting in the dry-bulk industry. During the second and third quarters, when the freight rates were at all-time highs, DryShips upped its long-term charters to more than half its business. That had the effect of locking in rates for an average of five years.
On Monday the Baltic Dry Index, which is managed by the Baltic Exchange in London and measures dry bulk shipping rates on 40 routes across the world, fell for the 21 st straight session, slipping 24 points, to 847. Freight rates on Capesize ships, the mega-carriers that can't fit through canals, declined 4.4%, to $5,716, down from $5,982, on Sunday, and 28.9% lower than the prior week. The Baltic index has been hit by worries over tumbling steel prices, the global credit crunch, a slowdown in the world economy and declining demand for commodities.
On Monday, DryShips reported that its third-quarter net income jumped to $179.98 million, or $4.21 per share, up from $105.28 million, or $2.97 per share, in the prior year. This included a capital gain on the sale of two vessels of $65.8 million or $1.54 per share and a noncash loss of $36.8 million, or 86 cents per share, associated with the valuation of interest-rate swaps.
Excluding these items, net income was $151.0 million or $3.53 per share, below analysts’ expectations of $3.60 per share for the quarter.
Revenue jumped to $329.0 million, up from $150.0 million last year, beating analysts’ estimate of $306.0 million.
Meanwhile, the company's Ocean Rig unit, an ultra deep-water drilling operator, contributed $89.0 million to DryShips' bottom line.
DryShips said the spin-off of the ultra deep-water driller will occur on schedule; the new entity will be named Ocean Rig UDW.
Day rates for ultra-deep water drilling remains very strong--the company said it recently struck a fixture between $640,000 and $650,000 a day for a term of five years.
Ahem!.. DRYS went soaring 14.0%, or $2.69, to close at $21.94????
WOW!
I remember DRYS. It was trading around 110 back in May 2008! And now it's 21.94??!!
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