Lagging small-vessel rates may push Handy stock investors to Japanese Shipping Giants

22 August 2017, Global –The recent surge in Capesize and Panamax spot freight rates coupled with weaker chartering activity in the Handymax and Handysize vessel segments could drive some profit-taking in Handy operators Pacific Basin Shipping (2343:HK), First Steamship (2601:TT) and Precious Shipping (PSL:TB) whose share prices have already risen 48%, 37% and 29% ytd in favour of the Japanese shipping lines Nippon Yusen Kaisha (9101:JP), Mitsui OSK Lines (9104:JP) and Kawasaki Kisen (9107:JP) which have been laggard performers year-to-date and are among the top 5 largest Capesize fleet owners in the world.

In our report below, we track the latest chartering activities in the dry bulk shipping spot market, checking back against our demand-supply growth forecasts for each vessel segment and overall global dry bulk shipping demand-supply outlook in the next 3 years.

Capesize, Panamax versus Handymax, Handysize

The recent surge in Capesize and Panamax spot freight rates is mainly driven by growing iron ore and coal shipping demand by China and Japan. The rising share of ships chartered to carry freight from South America to Asia helps to lift ton-mile demand and absorbs more capacity which is favourable for the global dry bulk shipping sector. Meanwhile, chartering activity in the smaller vessel segments has been weaker y/y which have resulted in more limited rate improvements in the Handymax and Handysize vessel segments.

Chart: Global dry bulk shipping stocks performance year-to-date

Chart: Global dry bulk shipping stocks performance year-to-date

 

GLOBAL DRY BULK SHIPPING SUPPLY GROWTH YEAR-TO-DATE IS TRENDING IN LINE WITH OUR FORECAST

The global dry bulk shipping capacity has risen 2.6% ytd to 814 million dwt at the start of August 2017. This is 3.8% higher y/y. If we were to annualize the ytd capacity growth, the global dry bulk shipping capacity growth is likely to be 4.6% in 2017, trending slightly below our 4.9% capacity growth forecast.

We expect the global dry bulk shipping sector capacity to grow 4.9% y/y in 2017, slightly ahead of our forecast global dry bulk shipping demand growth of 4.3% this year. This, plus the industry oversupply accumulated in the historical years, could prevent freight rates and the BDI from rising more significantly than their current levels. 

We believe the industry will see more significant improvements from 2018 and 2019 when the global fleet capacity growth is expected to moderate markedly to 2.1% and 0.9% respectively, unless a significant number of new vessel orders with prompt delivery dates are placed going forward.

This will help drive greater upside in the dry bulk shipping rates as we expect the global dry bulk shipping demand to grow 3.5% in 2018 and 3.0% in 2019, ahead of the global dry bulk shipping capacity growth.

However, the risk of a boom-bust cycle remains as the dry bulk shipping sector has the lowest barriers to entry among the various shipping segments and fairly short vessel construction lead times. A strong rebound in freight rates could revive rapid newbuild vessel ordering again and cap their long-term upside.

Chart: Baltic Dry Index (BDI) versus Global dry bulk shipping ton-mile demand and supply growth (2000 to 2019)

Chart: Baltic Dry Index (BDI) versus Global dry bulk shipping ton-mile demand and supply growth (2000 to 2019)

IMPLICATIONS FOR ASIAN DRY BULK SHIPPING STOCKS

The Asian dry bulk shipping stocks have historically had a positive correlation (of 0.66) with the Baltic Dry Index as well as the Baltic Exchange Indices of each major vessel segment (BCI, BPI, BSI and BHSI). We expect their share prices to stay fairly range-bound near term and re-rate more strongly next year.

Chart: Crucial Perspective Dry Bulk Shipping Stocks Index versus Baltic Dry Index (2006 to 2017)

Chart: Crucial Perspective Dry Bulk Shipping Stocks Index versus Baltic Dry Index (2006 to 2017)

 

Chart: Baltic Dry Index surged 11% w/w and 84% y/y

Chart: Baltic Dry Index surged 11% w/w and 84% y/y

 

CAPESIZE SPOT RATES HAVE TRIPLED IN THE PAST MONTH AND PAST YEAR, WITH CHINA & JAPAN DRIVING SHIPPING DEMAND GROWTH

  • The Baltic Exchange Capesize Index (BCI) surged 28% w/w and 207% y/y.

Chart: Baltic Exchange Capesize Index (2016 to 2017)

Chart: Baltic Exchange Capesize Index (2016 to 2017)

 

  • Chartering activity picked up in the Capesize market. More Capesize vessels were chartered in the spot market during the week, up 4% w/w and 11% higher y/y.
  • This has driven the strongest growth in the Capesize freight rates among the various vessel segments in the past month.
  • China and Japan’s shipping demand remained buoyant. 60% of these vessels are carrying these cargo to China, 18% to Japan/Singapore-Japan, 10% to Europe and the remaining 12% to other countries.
  • Although Australia remains the largest source of cargo, rising shipments from Brazil are lifting ton-mile demand which helps to absorb more industry capacity and is favourable for freight rates. 45% of the Capesizes are loading from Australia, 20% from Brazil and the remaining 35% from other countries.  
  • Coal shipping demand has picked up. 69% of the Capesizes were chartered to carry iron ore, 27% were chartered to carry coal and the remaining 4% others.
  • We expect the Capesize market to improve gradually, with fairly balanced global iron ore shipping demand growth and Capesize market net capacity growth of 4% in 2017 and 2018 based on our forecasts. 2019 could be a bumper year for the Capesize market as global net capacity is expected to grow only 2% based on the existing newbuild vessel orders, well below the global iron ore shipping demand growth.

 

Chart: Global iron ore shipping demand versus Capesize segment capacity growth (2000 to 2019)

Chart: Global iron ore shipping demand versus Capesize segment capacity growth (2000 to 2019)

  • The iron ore inventory levels at China’s ports have receded from their record high levels in late June. The level of China’s iron ore inventories at ports are still 30% higher y/y but have fallen 4% in the past 2 months from their peak at 141 million tons on 23rd June 2017.

Chart: Iron ore inventory levels at China’s ports (2012 to 2017)

Chart: Iron ore inventory levels at China’s ports (2012 to 2017)

 

PANAMAX RATES HAVE NEARLY DOUBLED Y/Y, WITH RISING CARGO EXPORTS FROM SOUTH AMERICA AND HIGHER DEMAND FROM JAPAN

  • Freight rates continue to improve. The Baltic Exchange Panamax Index (BPI) rose 7% w/w and 86% y/y.

Chart: Baltic Exchange Panamax Index (2016 to 2017)

Chart: Baltic Exchange Panamax Index (2016 to 2017)

  • The chartering market was buoyant in the Panamax segment during the week. The number of Panamax vessels chartered in the spot market rose 18% w/w and was steady y/y. 
  • 36% of the Panamaxes are loading cargo from South America, 13% from Indonesia, 9% from Australia and the remaining 42% from other countries. 
  • 57% of these vessels are carrying these cargo to Japan or Singapore-Japan, 13% to China, 10% to India and the remaining 20% to other countries. 
  • Capacity growth could outpace shipping demand, capping significant upside in Panamax rates near term. We expect the Panamax market to face industry oversupply challenges based on our projection that the Panamax market’s net capacity will grow 4% y/y in 2017. Although we expect the global coal shipping demand to improve this year, rising 3% y/y, the improving volumes are unlikely to be sufficient to offset the additional shipping capacity coming onstream. We expect the Panamax market to become more favourable from next year as capacity growth decelerates to 1% in 2018 and remaining steady in 2019, below our projected coal shipping demand growth of 2% and 1%. 

 

Chart: Global coal shipping demand versus Panamax segment capacity growth (2000 to 2019)

Chart: Global coal shipping demand versus Panamax segment capacity growth (2000 to 2019)

 

HANDYSIZE & HANDYMAX MARKET QUIETER THAN THE LARGER VESSELS’, RESULTING IN LIMITED RATE IMPROVEMENTS

  • More limited improvement in spot freight rates in these smaller vessel segments. The Baltic Exchange Supramax Index (BSI) rose 6% w/w while the Handysize Index (BHSI) held steady w/w. On a y/y basis, the BHSI rose 13% y/y.
  • This could drive some profit-taking in major Handy operators Pacific Basin Shipping (2343:HK), First Steamship (2601:TT) and Precious Shipping (PSL:TB) whose share prices have already risen 48%, 37% and 29% ytd in favour of the Japanese shipping lines Nippon Yusen Kaisha (9101:JP), Mitsui OSK Lines (9104:JP) and Kawasaki Kisen (9107:JP) which have been laggard performers ytd.

Chart: Baltic Supramax Index (2017)

Chart: Baltic Supramax Index (2017)

 

Chart: Baltic Handysize Index (2016 to 2017)

Chart: Baltic Handysize Index (2016 to 2017)

 

  • Chartering activity surged in the Handymax market. The number of chartered Handymax vessels surged 32% w/w in the spot market but this was still 34% lower compared to a year ago.
  • China and Indian Subcontinent’s import demand dominated the Handymax market. 35% of the Handymax vessels are chartered to carry cargo to China, 27% to the Indian Subcontinent and the remaining 38% to other countries. 
  • In the Handysize market, market demand was weaker. The number of Handysize vessels chartered in the spot market fell 14% w/w and 25% y/y. Asia’s shipping demand remained steady but Europe’s demand fell. 
  • Handymax market is likely to face greater oversupply challenges. We expect the Handymax market to be the least favourable market among the various dry bulk vessel segments this year with continued industry oversupply while the Handysize market is likely to suffer from slightly oversupply.
  • On a combined basis, we expect the Handymax and Handysize segments’ net capacity to grow 6% y/y this year, surpassing our projected minor bulks shipping demand growth of 5%. 
  • However, this situation is expected to reverse from 2018 where we expect net capacity to decelerate to 1% in 2018 and remain steady in 2019 versus our projected minor bulks shipping demand growth of 4% and 3% respectively, supporting freight rate recovery in the smaller vessel segments in the longer term. 

 

Chart: Global grains and minor bulks shipping demand versus Handymax and Handysize segments capacity growth (2000 to 2019)

Chart: Global grains and minor bulks shipping demand versus Handymax and Handysize segments capacity growth (2000 to 2019)

 

Related Articles:

Shipping Equities gain from structurally improving sector outlook

“Belt and Road” Initiative’s impact on global dry bulk shipping and other BDI updates

Global Dry Bulk Shipping Outlook – Is the current Baltic Dry Index (BDI) rally sustainable?

 

 

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