Tuesday, November 25, 2008
Imarex Brief 25th November 2008
Tankers
Crude
VLCC Ag/East: ws 64 ($50 k/day) down
Suezmax Wafr/Usac: ws 92.5 ($32k/day) down, but possibly bottomed
Turkish Straits Delays: 4-5 n / 4-5 s increased
The Andromeda Strain: We have seen 36 December cgos fixed and rates have moved softer – not a
good sign for those who are into following signs. All told, things aren’t too bad – except for that rascally
trend, which continues to imply a soft underbelly. The ws 64 reported on the Andromeda was a few more
points down than we are comfortable with. A few points up and down here or there is part of the biz – but
hopes that the tanker market could hover near the ws 70 mark have been deflated. Though the Suezmax
sector has given back a few points of its own, increased activity has led some to call for a potential
bottom. The increased straits delays could help out.
Crude FFAs have been a touch slow today as we approach the Thanksgiving holiday in the US. With
TD3 spot and Dec both in the low/mid 60s – it appears the sluggish market is expected to maintain itself
into the new year. The increased physical activity on the TD5 route has moved that market above the
spot rate of 92.5 and closer to the 100 level.
Clean
37k Cont/Usac: ws 175-180 ($16k/day) possibly softer
38k Caribs/Usac: ws 160 ($13.5k/day) down
55kt Ag/East: ws 215 ($35k/day) down
We pushed for a change in the Atlantic basin rate structure, and unfortunately – we got one. The
Caribs/Usac route has given back another 5 points, down to 160, while Cont/Usac is expected to soften
further by some (though some believe the 180 should hold). In the East, the steady slide
<<drumroll>>…….continues. Until demand returns, I would expect the slide to maintain itself.
Finally we see good activity on TC2, though Dec trades down 5 points to 185, a few points closer to spot.
TC5 Dec trades up 3 points to 195, though volumes have been light.
Dry Bulk
BDI 804 down 20
BCI 932 down 23
BPI 804 down 44
BSI 641 up 1
BHSI 321 up 2
Too many ships and too few cargos. Though the increased ore movements from India to China have
offered subdued hope, the bigger picture remains bleak. The Panamax mini-rally of two weeks ago has
faded on elusive demand. The World Bank has cut its growth forecast for China to 7.5% (from 9.2%).
Omar Nokta at Dahlman Rose reports that Nippon Steel and JFE Holdings announced further steel
production cuts – confirming the trend of a softening macro backdrop. On the same note, Platts is
reporting that Baosteel has cut some steel prices. None of this bodes well for ore consumption – and just
about any other type of relevant consumption.
Dry Bulk FFAs
Contract Close Current Diff
======================================
BDI Dec 1200 1200 -flat
BDI Q1 1600 1600 -25
BDI Q2 2250 2225 -flat
CS4 Q1 $10,207 $10,250 +$43
CS4 Cal 09 $17,386 $17,250 -$136
PM4 Q1 $10,053 $10,100 +$47
PM4 Cal 09 $13,344 $13,100 -$244
SM6 Q1 $8,313 $8,000 -$313
SM6 Cal09 $11,281 $11,000 -$281
Thin volumes as prices remain soft. Anyone looking to play the ratio trade will note that the Q1
Cape/Panamax ratio is effectively 1, noticeably lower than the historical norm of 1.85 or so. Though there
is no such thing as a free lunch – anyone looking for a hedged long position should consider this trade.
Equities
The NAT/FRO pairs trade took another 3% hit yesterday, which is the unfortunate nature of this beast –
especially when FRO is the short leg. George Glass is holding on tight for the time being, though it
seems some investors in the sector are unaware of the difference between wet and dry. The following is
from thestreet.com, “In the "Mad Mail" viewer feedback segment, Cramer told a viewer that when it comes
to dry bulk shippers, he's only trusting Nordic American Tanker and would not consider rival Excel
Maritime.” While I am sure Cramer knows the difference between iron ore and crude oil, I am not sure
that enough investors do. Sometimes that’s a good thing, as the presence of goats in a market provides
for profit opportunities. However, en masse – the goats can cause you a lot of pain when they are
running the wrong way – straight into your trade. On any given day – the goats can run you out of town.
And on that specific day – they are right and you are wrong…and there is nothing you can about it.
In ratings news…
Starbulk – 1 Buy, 1 Hold
- Omar Nokta maintains a HOLD on SBLK, calling it one of the safer plays in dry bulk, though he
mentions concerns on counterparty risk.
- Charles Rupinski maintains a BUY on SBLK ($11), citing their underleveraged position relative to the
sector.
Other…
- Justin Yagerman maintains a MARKET PERFORM on TNK, citing attractive dividend yield – though
believes their spot exposure and full payout model will provide for noticeable volatility.
- Scott Burk initiates coverage of ESEA with an OUTPERFORM ($6). He cites ample liquidity and
minimal risk to bankruptcy or covenant violation, though mentions global recessionary concerns.
- Scott Burk initiates coverage of FREE with a PERFORM, citing solid charter coverage in 2009, though
writes that debt covenants could be in jeopardy if asset prices continue to decline.
- Scott Burk initiates coverage of OCNF with a PERFORM, citing long term charter coverage being able
to support 2009 forecasted dividend, though writes that debt covenants are at risk if market weakness
continues.
- Anders Rosenlund maintains a HOLD on SFL, though he reduces target to $9.50 (from $22).
Thoughts on dry bulk asset valuation from Greg Lewis’s note…”What’s a Lady Worth Anyway?”
Unfortunately, given the current uncertainty in the freight market and the availability of financing from
banks the answer is challenging to say the least. In a distressed market where there are more sellers
(especially if they are forced sellers) than buyers asset prices can overshoot to the downside. Likewise if
the amount of tonnage for sale is scarce (more buyers than sellers) asset prices can overshoot to the
upside. While we believe there is long term value that will eventually be unlocked from buying assets at
current prices the current lack of financing by banks will most likely keep many potential ship buyers on
the sidelines, hence putting further downward pressure on asset prices. We also note in the current
environment the acquisition of a ship may result in near term negative cash flows after interest and debt
amortization are accounted for.
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