The upswing in Baltic Dry Index numbers recently to a 14 month high closing at 4661 on 19 November 09, raised hopes that a revival for the shipping sector is afoot sending shipping stocks zooming. Freight and tanker rates dropped sharply in July - September 09 quarter, but gained strength in October 09 which has sustained through November 09 as well. They hit 10 year lows in the December 08.
The Baltic Dry Index tracks the global shipping prices of various dry bulk cargoes. Mainly driven by Chinese demand, the average BDI is expected to bounce up 50% to 3500 this quarter, according to a Citigroup Global markets report. This expectation is based on rising steel consumption (especially construction steel), grain harvest in the autumn besides an established pattern of seasonality where the onset of winter pushes up heating oil demand and therefore shipments.
India impact
The key for Indian shipping companies are tanker rates as almost 75% of fleet of these companies consists of Aframax class tankers, which are mid-size vessels, according to Icici Direct research. Tanker rates were floundering for most of 2QFY10 but have since gained significantly led by the VLCC class (up 282% over the previous month to an average price of USD 12261 per day in October 09. The Aframax class term charter rates were up nearly 54% m-o-m to USD 3742 per day. The rates have strengthened further in November 09 closing at USD 8824 per day on 12 November 09.
The outlook for tanker rates is firm through till FY11 according to a Man Financial report, however, dry bulk freight rates may be capped as new assets are expected to hit the water next year.
The side story
Indian shipping has also seen a prolonged war for control of Great Offshore between Bharati Shipyard and ABG Shipyard. This has come to a head with a SEBI intervention in the bidding war which was halted temporarily. SEBI has indicated that the companies can go ahead with open offers in December 09 with an option to revise the offer price within 10 days of launch. ABG’s last open offer price for 25% of equity share capital was Rs 506 per share and Bharati Shipyard had countered with an open offer price of Rs 560 per share for 20% of equity share capital.
An Emkay brokerage report expected the bidding to be aggressive and believes that Bharati Shipyard had a stronger chance of prevailing as it has 23% of shareholding versus ABG which has 8%. Naturally every increase in the open offer price dampens the short-term outlook for the potential acquirers while benefitting the minority shareholders of the target. The acquisition becomes earnings neutral for ABG at Rs 650 per share of Great Offshore and Rs 900 per share for Bharati Shipyard according to Emkay research estimates in terms of a leveraged buyout.
Government is also taking initiatives to boost the relatively low volumes of domestic trade via shipping on coastal waterways through tax breaks.
Shipping stocks were up significantly (see Shipping bonanza) in the last fortnight paralleling the improvement in freight rates. A higher-than-expected increase in demand for crude/ bi-products and compliance with single hull scrapping are other possible triggers, as per an IDFC-SSKI report.
Shipping Bonanza
Company
Latest Price (Rs)#
PBIDT (Rs cr) FY09
PAT (Rs cr) FY09
EPS (Rs ) FY09
PE*
Returns (15-days)
Returns 3-mth
Returns 6-mth
ABG Shipyard
202.7
387.9
171.2
33.3
6.1
9.7
10.3
1.8
Bharati Shipyard
164.6
268.5
133.6
48.0
3.4
8.7
-11.8
15.4
Essar Shipping
67.3
936.9
77.2
1.3
53.8
14.7
10.3
-3.2
GE Shipping Co
289.2
2031.9
1417.8
91.7
3.2
16.1
11.4
9.8
Great Offshore
540.2
543.4
275.1
69.4
7.8
4.4
0.1
84.7
Mercator Lines
62.3
957.5
467.0
19.7
3.2
31.7
15.1
8.4
S C I
149.4
1443.1
940.7
22.2
6.7
12.3
15.6
22.4
# NSE closing price on 20/11/09 *Trailing on FY09 EPS
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