The coronavirus pandemic has battered dry bulk shipping to the point where profitability may not be seen next year, but a top sell-side analyst still sees some hope for the sector.
Shipping's largest segment should rebound next year off of 2020 lows to a 5% gain in US gross domestic product and 2.4% re-acceleration in demand growth, Evercore ISI's Jonathan Chappell said.
"We expect an economic recovery to begin in 4Q20, but I think any forecaster would admit we’re working off a base of maximum uncertainty," he told TradeWinds.
"But it is this macro outlook that supports our view of a stronger 2H20 than 1H20."
This outlook depends on factors such as further outbreaks and vaccine availability, he said, but the global economy should improve at least somewhat from its current abysmal state.
"For 2021, we expect a much rosier outlook, both for the global economy and dry bulk demand," he wrote Thursday in a 12-page "Dry Bulk Shipping: Can't Catch a Break" report.
Such optimism depends upon Brazilian iron-ore giant Vale's return to full output after the January 2020 dam break and how fast the world economy recovers, he said.
"All else equal we believe that the potential recovery next year could be even stronger than our model suggests," he wrote.
Unfortunately, the recovery will most likely not be strong enough to bring the sector back to profitability, he added.
"All told, we believe there will be trading opportunity in this space at some point this year, but we don’t see the catalyst today, thus we remain on the sidelines," he wrote.
Positive outlook aside, the sector is in the midst of a global financial crisis that has made dry bulk equities so unattractive to investors that they may not even buy them.
"Thus, the real question today is not one of 'value', rather 'why do I need to own these stocks?'' he wrote.
"And, at least as we sit here today in the midst of a global economic crisis that is sure to pressure near-term commodity demand and is likely to lead to ongoing operating losses through our forecast horizon, the simple answer is 'you don’t''.
Evercore revised price targets for Eagle Bulk to $3.50 from $6.50, Genco Shipping & Trading to $10 from $14 and Scorpio Bulkers to $28 from $80. Respective net asset values stand at $3.38, $11.51 and $48.
Eagle Bulk's shares slid 2% to $1.75 in early-morning trading Thursday on Wall Street, while Genco's stock gained less than 1% to $6.05. Scorpio Bulkers shares fell less than 1% to $21.61.
Capes may allow for 'good trade'
Chappell still expects the opportunity for a "good trade" at some point this year since capesize rates have "leapt off" early 2020 unsustainable lows as China and Vale both return to normal, he said.
"However, it’s hard to see either of those factors developing in the immediate future given the uncertain global macroeconomic outlook, and it doesn’t appear that the upcoming earnings period is set to provide any materially positive financial updates," he wrote.
Cape rates continued their steady improvement since late March as the Baltic Exchange Capesize Index moved up 93 points Thursday to 887.
Capesize weighted timecharter equivalent average across five routes gained $557 to $9,223 per day.
"Sentiment continues to build in the Atlantic as stronger fixtures and trading levels were heard during the day," the exchange said in its daily market report.
"Several major charterers were linked on ballaster route business with some looking for tonnage beyond Baltic window dates.
"The Pacific market trade remained steady, near last done levels."
