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Wednesday, July 29, 2009

Drybulk earnings to be mostly in line with expectations

Wednesday, 29 July 2009

Most drybulk shippers are expected to report second-quarter earnings in line with Wall Street expectations, as a high degree of locked-in long-term contracts prevent them from taking advantage of the recent spike in charter rates. Drybulk shipping companies -- hit by the crash in charter rates for their ships due to the slump in demand for commodities such as iron ore and coal -- have been looking at increasing the long-term contract coverage for their shipping fleet and reduce the spot market exposure. However, charter rates have been rebounding from their lows.
This earnings season will be kicked off with Genco Shipping & Trading Ltd reporting its second-quarter results on July 29. "I think the quarter was pretty strong. The volume of iron ore into China was pretty much at a record high and that had a real impact on cape vessels. In the second half of the quarter, rates really started to rise significantly," analyst Natasha Boyden of Cantor Fitzgerald said. Boyden noted that the significant amount of port congestion also added to keeping rates high.
"Capesize rates, in particular, were nearly double the first quarter levels," Boyden wrote in a note to clients. Capesize vessels are the largest type of ships that are used to transport commodities such as iron ore and coal. Dayrates for capesize ships averaged about $40,000 a day for the second quarter, compared with the first quarter average of about $20,000. However, while day rates have gone up, drybulk shippers' exposure to the spot market has shrunk. "If you looked at the beginning of April, the average contract coverage for the year was 70 percent. Right now for the full year 2009, these guys have on average across the industry 77 percent contract coverage " analyst Scott Burk of Oppenheimer said over the phone. Excel Maritime and Dryships will be the most likely to beat estimates as they have the highest exposure to the spot market.
Burk noted that 35 percent of Excel Maritime's fleet is exposed to the spot market, followed by Dryships, which has a 32 percent spot exposure. The least likely to beat estimates will be Diana Shipping Inc .The company has the lowest spot exposure among its peers with 95 percent of its fleet under contract coverage, Burk noted.
BETTER Q3? While second-quarter earnings are expected to be strong, third-quarter profits are expected to be better than second quarter.
"I think third quarter will probably end up being on average better than second quarter for the drybulk guys," FBR Capital Markets analyst Rob MacKenzie said.
MacKenzie expects cape rates to average about $50,000 in the third quarter -- higher than the $40,000 averaged in the second quarter.
However, rates are expected to trend down after that.
"Rates will continue to fall because there is just way too much supply of ships in the market and coming -- for the demand there is for bulk cargoes. We are seeing port congestion lighten up in Australia and so on, and that is going to put more downward pressure on cape rates," MacKenzie said.
Oppenheimer's Burk agrees that there is good potential that the third-quarter is going to be stronger. However, its not going to be a huge increase because most of these guys have their rates already essentially locked in, he added.
Burk said that, for the industry as a whole, he is looking to get indications of the sustainability of iron ore imports into China and also if high day rates have caused the order book to solidify.

Source: Reuters