Dry Bulk Shipping - Bi-weekly: BDI correction, near-term rebound

The BDI declined for 10 consecutive days due to weaker iron ore trade as well as seasonality, and it has already stabilised. We expected near-term rebound. Reiterate UNDERWEIGHT.

BDI’s correction due to seasonality. The Baltic Dry Index (BDI) declined by 18% over the past two weeks, mainly due to seasonality. Weak coal demand, quiet grain trade, and fewer chartered-in activities from Australian iron ore miners caused BDI to fall for 10 consecutive days. Rates stabilised later in the week ended 14 August.

Capesize. Fewer chartered-in activities from iron ore miners hence eased ports congestions in China, Brazil and Australia dragged down the Capesize rate. Average earnings fell by 2.5% wow to US$42,972/day.

Panamax. Panamax rate recorded a bigger decline than Capesize due to quiet grain exports from Latin America, weaker global demand for coal, and China’s decrease iron ore import from India. Average earnings fell by 0.6% wow to US$15,390/day.

Handymax/Handysize. Dragged down by Capesize and Panamax rates as well as fewer enquiries, average earnings of Handymax fell by 11.9% wow to US$17,625/day.

We expected a rebound in BDI in the near term after an 18% decline in two weeks. We see strong production of small steel mills in China and a global recovery in grains and other minor bulk trades helping the rates to rebound in the next two weeks. In the longer term, we maintain our conservative view with a BDI forecast of 2,500 for 2009 based on our 2009 steel production forecast of 514mt, considering steel inventories are building up and steel prices are showing signs of weakness.

Rise in iron ore stockpiles stops. The continuous rise in Chinese ports’ iron ore inventory was over. On 14 August, the inventory decreased by 1% to 74.55mt, from 75.29mt, still at a high level. Small- to mid-sized steel mills were rapidly resuming production while fewer chartered-in activities from iron ore miners caused the first two weeks of decline in iron ore inventories since the beginning of the year.

In our shipping sector’s 1H09 results preview, we raised the fair price of COSCO (1919.HK/SELL) and China Shipping Development (1138.HK/SELL) to HK$8.50 and HK$10.40, respectively, but maintain SELL rating. We also raised the fair price of Pacific Basin (2343.HK/SELL) and STX Pan Ocean (STX.SP/SELL) to HK$5.80 and S$11.00 respectively in the 2Q09 results update, and maintain SELL rating. We suggest selling expensive dry bulk stocks. COSCO is our top SELL.

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