Ever-rising dry-bulk freight rates are prompting more investor enthusiasm for bulker owners. But analysts caution that the sector remains fraught with perils.
The Baltic Exchange’s Dry Index (BDI) reached a one-year high of 937 Thursday, led by the ongoing surge in capesize rates. The Baltic’s assessment of capesize rates across multiple routes also reached a one-year high of $15,301 per day.
Since the BDI hit its 10 February low of 290, shares of bulker owners have rallied, albeit off of very low share prices. Diana Shipping shares have risen 35%, Navios Maritime Holdings are up 60% and Safe Bulkers are up 288%.
The ongoing strength in the dry bulk rates prompted Axia Capital Markets to upgrade Petro Pappas-led Star Bulk Carriers to a buy rating as “we expect the shares to rally with the BDI through the end of the year.” Star Bulk shares up 142% for the year.
Axia analyst Robert Perri still expects the company to report losses through the end of next year. However, the recent announcement of a deal with lenders to defer debt amortisation and the $51.5m in new equity capital will “buy time for the market turn-around which we expect to occur around 2018.”
Perri says the upgrade reflects the recent strength in the BDI and the expectations that rates will remain firm through the seasonally strong fourth quarter. He says there is still risk that demand will weaken in the first part of 2017.
“This is more of a trading call than an industry call,” Perri said.
China iron, coal imports up
In an earlier report on the dry-bulk industry, Perri said the “worst is over” for the industry, but rates could still drop back below operating expenses in the first part of 2017.
China surprised to the upside with the country showing double digit gains in iron and coal imports year-to-date, countering earlier predictions of flat to declining demand this year. That helped boost rates even in the face of 1.2% overall growth in a fleet Perri calls “already oversupplied.”
Other analysts too report increasing queries from major about the dry bulk industry. Speaking on a panel at the TradeWinds Shipowners Forum USA in New York, Deutsche Bank analyst Amit Mehrotra said he was “getting a lot more calls about dry bulk name after companies like Star Bulk and Scorpio Bulkers have successfully raised equity and extended their cash runway.”
Evercore ISI analyst Jonathan Chappell also reported more queries about dry bulk shipping in recent weeks than over the entire course of 2016.
But Chappell also cautions the spike in rates may only be a short-term phenomenon, brought on by China’s stimulus measures earlier this year. In particular, a surge in Chinese home prices has led to more housing construction, and thus better steel demand.
But Evercore warns that the spikes in housing prices might prompt a counter response from Chinese policy makers that would slow new residential construction “and have a related negative impact on Chinese steel and thus iron ore demand.”