Baltic Dry Index Ends Lower And CIMB Expects BDI to Average 2500pts for 2010

The Baltic Dry Index closed much lower again. Second down day for the index - ending the previous 7 days of advances.





CIMB Research had a report out on the Dry Bulk Shippers yesterday and they are underweight for the sector.

• Price arbitrage favouring commodity imports explains BDI increase. The substantial rise in the Baltic Dry Index over the past six months, despite global weakness in steel production and electricity demand, has been driven singlehandedly by China. As freight-inclusive cost of iron ore and coal imports fell below domestic alternatives from the start of 2009, Chinese steel mills and independent power producers accumulated significant amounts of foreign ore and thermal coal. In 4M09, China imported 22.9% more iron ore even though crude steel production rose a mere 0.7%. China also purchased 71% more coal from Australia and Indonesia during 5M09 even though electricity production fell 4% yoy.
  
  • Are we past the year’s peak? However, the tsunami of imports may be coming to an end. Adding the rise in the fob prices of commodities and the more expensive freight, the cfr prices of imports have now closed the gap with domestic Chinese prices and are now more expensive in some cases. If this situation prevails, we expect Chinese buyers to return to domestic sources and reduce their imports. This could cause the average BDI for 2H09 to be lower than in 1H09.
  
  • 10% hoh capacity growth in 2H may be possible. With freight rates now comfortably above breakeven operating costs, dry bulk owners are likely to accept newbuilding deliveries rather than defer them further, especially since the majority of 2009 orders may have already been financed. We expect capacity growth of about 10.2% hoh in 2H, against just 3.1% growth in 1H. This could result in a moderation of the BDI levels over the next six months.
  • Maintain UNDERWEIGHT on dry bulk shipping. We believe that the odds of a correction in the BDI in the next six months are significantly higher following the convincing rise in cfr import prices over the past few weeks. We are currently forecasting the BDI to average 3,000 points in 2H09 vs. more than 4,000 points currently and an average of 2,000 points in 1H. This will take our full-year average to 2,500 points, up from our previous forecast of 1,000 points. For 2010, we expect the BDI to also average 2,500 points (previous forecast 1,200 points) while for 2011, we are retaining our forecast of 3,000 points. According to Imarex data, the BDI futures for 3Q09 is priced at 2,825 points, which is 31% lower than the current level, while the futures curve for 4Q09 is priced at an even lower 2,350 points.
  
  • We are retaining all our Underperform recommendations except for Pacific Basin which we downgrade from Neutral to Underperform. We will revise our earnings forecasts for the new BDI expectations after going through a comprehensive review. We expect TTA and Pacific Basin to be profitable in CY10, against our current loss forecast, while PSL should see higher profits and STX lower losses. We do not anticipate a change in our recommendations. Our target prices remain intact for the time being. We believe that stockmarket valuations have priced in significant positives for the dry bulk sector. Investors should take profit before the expected moderation in China’s commodity imports in 2H09.
  
  

oO .... look at CIMB's target price for Maybulk!

Here is how Maybulk is doing.

Not looking too sharp and perhaps taking profit instead of selling at a loss would have been a smart option the other day!

How now my dearest Moo Moo Cow?

:D