Baltic cap

Fears dropping demand and rising supply will cap dry cargo rates at around break-even levels over the next two years has led Credit Suisse to slice its outlook for Asian bulker owners.

Axing 30% of the newbuilding orderbook and a 7% scrapping rate will not prevent oversupply with several owners staring at red ink in 2009 and 2010, warns analyst Hung Bin Toh.

He said: “While commodity demand may improve sequentially from a low level, supply-side pressure is likely to cap the Baltic Dry Index in the next two years.

“In the near term, we see the BDI under pressure due to high China iron ore inventory and a seasonally weaker summer. Over the next two to three years, industry oversupply is likely to cap the BDI at 1,300-2,000 points (estimated cost break-even level for most owned vessels).”

The analyst cut his rating on the sector to “underweight” and also downgraded China Shipping Development from “outperform” to “underperform”.

He stuck by his underperform ratings on China Cosco and STX Pan Ocean as well as his “neutral” assessment on Pacific Basin.

Hung says dry-bulk demand will fall by 3.4% in 2009, bouncing back with a 4.2% growth in 2010. Supply, however, will climb 6.9% this year and 8.6% in 2010 even assuming 30% of newbuildings are cancelled and up to 50% of orders delayed, he believes.

Large chartered in fleets and capex commitments will hurt both Cosco and STX Pan Ocean, with losses continuing alongside “significant balance sheet deterioration” until 2010, Hung says.

“With the expiry of higher priced cargo contracts, Pacific Basin is likely to swing into small losses while China Shipping Development, Maybulk and U-Ming are likely to see earnings decline,” he said.

Hung added: “Assuming we are wrong on our dry-bulk demand growth forecast and China demand is stronger than expected, we think it is still unlikely that demand-supply can be balanced for the next two years.

“Should dry-bulk shipping demand turn out to be stronger than expected, order cancellations and delays, along with the scrapping of older vessels, are likely to slow down as ship owners turn more optimistic. This, in turn, exacerbates the vessel oversupply issue and freight rates are likely to remain depressed.”

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