Thursday, March 05, 2009
Counterparty risk continue to weigh on shipping stocks
Thursday, 05 March 2009
Investor fear of charter couterparty risk and weakness in freight rates may continue to weigh on the dry bulk shipping stocks in the near term. A counterparty risk arises when a charterer, who has hired a vessel from a shipping company, may not be able to pay the agreed freight rates. Ever since Greek dry bulk carrier Excel Maritime Carriers Ltd announced on Feb. 17 that it cannot assure its charterers may pay the agreed rates, the dry bulk stocks have witnessed sharp declines.
Since Feb. 17, the broader Dahlman Rose Dry bulk Shipping Index, which consists of 12 U.S.-listed dry bulk shipping companies, have fallen about 33 percent.
In contrast, the benchmark Baltic Dry bulk Index, which measures spot freight rates have risen about 6.3 percent. Normally, the dry bulk shipping stocks move in tandem with Baltic dry bulk index.
Jefferies & Co analyst Douglas Mavrinac said that since Excel's announcement, people became fearful of more counterparty charter defaults. But he added that there was no widespread charter defaults.
Oppenheimer analyst Scott Burk said charter counterparty risk is partly responsible for hurting dry bulk stocks.
Investors are still looking for exits, despite assurances from Diana Shipping Inc and Genco Shipping & Trading Inc that they were not facing any counterparty risk.
WEAK FREIGHT RATES
The second quarter 2009 forward freight rate for Capesize vessels have fallen 30 percent since Feb. 17 to about $23,500.
A tropical storm lashed Australia's northwestern coast last week, which forced iron ore miners like BHP Billiton Ltd/Plc and Rio Tinto to temporarily restrict some operations in the key Pilbara region. This further hurt the freight rates.
"The dry bulk rates have come down a little bit. The Capesize rates have fallen because of disruption in iron ore loading in Australia," Jefferies & Co analyst Douglas Mavrinac said.
Mavrinac said the storm disrupted iron ore shipment even though the demand for it is still robust.
Moreover, the commencement of iron ore shipment should help the freight rates.
"There are reports that iron ore loadings operations are beginning again in Australia after rains and floods suspended operations in the Pilbara region," Dahlman Rose analyst Omar Nokta said in a research note.
"Rio Tinto had mentioned that it intends to restart its operations by the end of last week which could lead to a more active market," Nokta said. Weaknesses in Chinese iron and steel prices and broader market may also continue to weigh on the dry bulk stocks.
Chinese spot steel prices fell 5.3 percent in a third consecutive weekly fall, on rising inventory after a much-anticipated demand recovery failed to materialise.
"Over the last three weeks the forward rates have come down, also seeing weakness in iron ore and steel prices, which potentially implies weaker rates in the future," Oppenheimer's Burk said.
Source: Reuters
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