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As per the data available with Bloomberg, the global shipping fleet grew by 9.8 YoY
and 5% in the last six months. Of this, the dry bulk segment saw the maximum
supply (+14.4 % YoY), followed by container and then the tanker segment. While
ocean trade of bulk commodities is estimated to grow by 6% in CY11E (Source:
WTO) and demand for oil is estimated to grow by 2% in CY11E (Source: IEA). This
demand supply mismatch is one of the strong reasons for continuous pressure on the
shipping freight rates.
We estimate the supply side pressure to continue with 45% or 275 mn dwt of the
current dry bulk fleet, 40% or 111 mn dwt of the current tanker fleet and 28% or
50 mn dwt in container segment currently on order with deliveries over CY11E to
CY13E.
The key dry bulk market indicator - the Baltic Dry Index has lost about 106 points or
~7% during the quarter. Similarly the other key dry bulk indices have lost from 5 to
15% during the quarter. However the Capesize index gained ~8% during the quarter.
Tanker market
In the tanker market, Q1FY12 was better for VLCC owners, while other size segments
(Panamax and Aframax) experienced drop in earnings. Put together, the global
tanker market looked in better shape in the quarter. Global geo-political problems,
increased demand from Japan and increased gulf production with Brent at
$110 per barrel supported the market. Going forward, the increased Saudi Arabian
production is expected to provide intermediate term support for the tanker rates, but
more increased production is needed to sustain the long term tanker recovery. Saudi
Arabia is currently reported to produce more than 3 million barrels per day in excess
and is looking to increase production to 10 million barrels per day by July, as long as
the spot Brent crude price remains above $110/ barrel. The oversupply is a serious
concern in the crude tanker market and International Energy Agency (IEA) is expected
the demand to be driven by non OECD nations
Oil demand and tanker supply
There is a strong correlation between demand for tankers and the demand of oil.
The International Energy Agency in June 2011 predicted that the average world oil
demand could rise by 1.1 million barrels a day (1.5% per annum) to 95.3 million by
2016. And we estimate tanker tonnage to increase by 3.2 % (11.9 mn dwt) for the
next two years. So there would be pressure on freight rates in the tanker segment.
Container market
The container market has been weak in the quarter with liners facing falling box
rates. The global container fleet has increased by ~ 10% YoY (as per Bloomberg)
with demand increasing in the range of 5 to 6% (as per Maersk).This mismatch has
put tremendous pressure on the rates. An increasing number of large ships are getting
delivered on the Far East to Europe trades. The spot rates for shipping of containers
out of Shanghai to Europe has now slipped below the USD 1,000 per TEUmark
(Source: BIMCO) for the first time since March 2009. The same was USD
1,400 a year ago.
Global cargo volumes for CY11 are expected to rise by minimum 5%, driven mainly
by the strong development in demand in the first quarter. We estimate the supply to
be roughly about 3.2% of the current fleet or 5.5 mn dwt per annum over CY11 to
CY13. The container shipping rates are expected to remain firm in most of the
routes in longer term.
Asset prices
Shipping asset prices typically move in tandem with the shipping freight rates but
with a lag of 3 months. With the fall in the shipping markets, the Shipping asset
prices have come down by 3 to 6 % YoY. The correction has been stronger for 2nd
hand vessels. With this we believe, the Net Asset Values (NAV) or the replacement
cost of ships per share may have come down by 3 to 6 % for Indian Shipping companies.
Price of bunker oil (fuel for shipping vessels) rose to record levels of $660 per barrel
during Q1FY12 vs. $460/bbl last year increasing ~45% YoY. We believe this would
hurt the spot market operations of Indian shipping companies increasing their cost of
operations. Bunker cost about 15 to 20% of the total operating cost of ship owners.
Shipping Corporation of India (Reduce: Target Price -Rs 122)
n We expect SCI's Q1FY12 revenues to decrease YoY by 3.5 % and increase 1.2
% QoQ to Rs 8,751 mn, led by improved tanker market and fleet expansion
n Operating profit is expected at Rs 1500 mn which translates into an operating
margin of ~17 %, falling almost 745 bps YoY from 24.5% primarily due to
higher bunker cost and subdued freight market.
n Net profit is expected at Rs 675 mn against loss of Rs 62 mn in Q4FY11 and
profit of Rs 1,915 mn in Q1FY11. The YoY fall would be primarily due to lower
gains from sale of ships and higher interest impact this quarter vs. last year.
n During the quarter, SCI contracted to buy two resale Supramax Bulk Carriers
from Grand Yard Investments of 57,000 dwt each. The company also scrapped a
product tanker of 29,755 dwt.
Great Eastern Shipping Company (Accumulate: Target Price -Rs
315)
n Q1FY12 consolidated revenue is expected to decline 3.5 % YoY and increase
3.3% QoQ to Rs 6,215 mn, primarily driven by the improvement in tanker freight
rates. Even the offshore segment is expected to do well in the quarter with crude
sustaining above $110 per barrel in the quarter.
n Operating profit is expected at Rs 3850 mn which translates into an operating
margin of ~38 %, falling almost 850 bps YoY from 24.5% primarily due to
higher bunker cost and subdued freight market.
n Net profit is expected at Rs 955 mn against negligible profit of Rs 107 mn in
Q4FY11 and profit of Rs 1,719 mn in Q1FY11. The YoY fall would be primarily
due to lower gains from sale of ships. It is also important to note here that the
company had provided for impairment of Rs 857 mn in Q4FY11.
n During the quarter, the company took delivery of one new build Kamsarmax
(80,700 dwt) dry bulk carrier. It also sold (scrapped) its 1989-built suezmax crude
carrier "Jag Lakshya" (152,000 dwt) leading to the profit from sale of ship during
the quarter.
Mercator Lines Ltd (Buy: Target Price - Rs 50)
n Q1FY12 consolidated revenue is expected to increase ~ 33 % YoY and increase
~ 3% QoQ to Rs 8000 mn with significant contribution from the coal segment.
Even the offshore segment is expected to do well in the quarter with crude sustaining
above $110 per barrel in the quarter. However the shipping segment with
heavy exposure to dry bulk segment is expected to report subdued numbers. The
coal segment (Oorja holdings) is expected to report revenue of Rs 4800 mn
(+12% QoQ; +110 % YoY).
n Operating profit is expected at Rs 1300 mn which translates into an operating
margin of ~16.25 %, declining almost 1950 bps YoY from 33.69% primarily due
to higher bunker cost, weak dry bulk market and increasing share of low Ebidta
margin coal business.
n Net profit for Q1FY12 is expected at Rs 135 mn against loss of Rs 685 mn in
Q4FY11 and profit of Rs 619 mn in Q1FY11. The YoY fall would be primarily due
to lower Ebidta margins because of weak dry bulk market. It is also important to
note here that the company had booked a total loss of Rs 447 mn in Q4FY11 as
loss on sale of the only jack up rig with the company had and sold to GE Shipping
in Q4FY11.
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