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Focus: Bulk shippers draw cheers from Baltic Index rally

Posted on: June 5, 2009


Reuters – Friday, May 29

* Baltic index surges, shipping shares jump

* Analysts upgrade recommendation on select shippers

* New dry bulk vessels still making losses

By Swati Pandey

MUMBAI, May 29 – Analysts and investors are turning optimistic on Indian shipping companies, thanks to the Baltic Dry Index’s <.BADI> surge since early April, but officials say high capital costs will continue to be a worry for the industry.

The London-based index, which tracks costs to ship key commodities, has risen over 18 percent so far this week, surpassing 3,000 points, for the first time since October 2008.

It has more than doubled since early April, according to Reuters data, on rising merchant trade, especially iron ore from China and some easing of trade financing by banks.

“There is demand from China. Now letters of credit are also being issued easily , unlike a few months back. Over the past one week, things are looking better,” Kapil Yadav, an analyst with Dolat Capital, said.

Indian shipping firms were reeling under the impact of a global economic slump on commodity trade, but the stimulus packages announced by the various economies has led to a revival of freight demand, analysts say.

Morgan Stanley this week upgraded its view on the global commodity shipping industry to “attractive,” saying it is turning incrementally bullish.

“There was some inventory build in January-March, but since then inventories are leveling off, supporting our view that the dry bulk market has entered a period of sustainable recovery,” analyst Ole Slorer wrote in a research note to clients.

Religare Hichens Harrison this month upgraded its rating on India’s Mercator Lines <MRCT.BO> to ‘buy’ due to “improving sentiments in the dry bulk market, where the company has maximum exposure’, while ICICI direct rated it an ‘outperformer’.

Shipping stocks also reflect this new-found optimism, outperforming the 30-share BSE index <.BSESN> which rose 47 percent between April 1 and May 28.

Shares in Mercator Lines and Essar Shipping <ESRS.BO> have more than doubled, Shipping Corp of India has risen 73 percent while GE Shipping <GESC.BO> about 50 percent in the same period.

WAY TO GO

Although shipping costs have surged from their lows hit in late 2008, new vessels will still make losses due to high capital and interest costs and high depreciation, officials said.

“Even at these rates, definitely, there are losses,” a senior official at state-run Shipping Corp of India <SCI.BO> said. “Only the older bulk carriers which are 20 years or so old will start breaking even at the current market price.”

Companies are still preferring to operate vessels on the spot as the market is still very volatile to lock-in an asset for long-term, officials and analysts said.

Capesizes or large cargo vessels are earning over $20,000 a day currently compared with $150,000-$200,000 a day in late 2007 while the smaller ones – panamaxes and handysizes – charge between $14,000-$19,000 a day, around their break-even cost.

“Freight rates are going up so shippers are getting higher revenues. Its still not time to lock-in. This spurt is mainly because of China and how long will it last we don’t know,” an analyst with a Mumbai-based brokerage, who has a neutral rating on GE Shipping, said.

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