3SOF

Shipping index plunges to six-month low; global cooling on cusp?

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MarketWatch
6:05 p.m. 01/20/2008  By Laura Mandaro 


Falling global demand for bulk commodities could indicate a global cooling
SAN FRANCISCO (MarketWatch) -- Worries that the global economy is following the U.S. into a slowdown have increased after an early warning indicator -- an index that tracks global shipping rates for bulk commodities -- plunged to a six-month low.

The Baltic Dry Index fell to a reading of 6,462 Friday, down nearly 30% since the start of the year and 42% from an all-time high reached Nov. 13, according to the Baltic Exchange in London.

The gauge, which tracks freight rates on the mammoth vessels that carry tons of soybeans, corn, coal and metals across the globe, is used by economists to get an early read on global trade and growth trends. When demand for those basic materials shrinks, freight rates drop and the index tumbles. The trend provides an early snapshot of trade volumes before governments compute reports.

"It's fallen quite significantly," said Bernard Baumohl, managing director at The Economic Outlook Group in Princeton, N.J. "It points to a slowing in the global economy."

Some analysts suggest extraordinary factors may be contributing to the severity of the decline. They include a drop in iron-ore cargo volumes from Brazil, perhaps influenced by merger talks between BHP Billiton Ltd. (BHP) and rival producer Rio Tinto Ltd. (RTP) ; weather conditions in Australia interfering with shipments; and suspected efforts by Chinese buyers to reduce imports to get better raw materials prices in upcoming contract talks, analysts say.

Though the decline is "probably consistent with some slowing in global growth," wrote Bank of America analyst Robert Sinche, "the dire economic scenario that some are suggesting is signaled by the BDI correction overstates the case."

As Wall Street waits for more trade data to confirm or refute the Baltic Dry Index's signals, analysts have plenty of evidence that U.S. shipping activity already has dropped off.

U.S. truck tonnage and rail volumes fell last year, hitting profits at trucking companies Ryder System, Inc. (R) and YRC Worldwide Inc. (YRCW), as well as railcar suppliers American Railcar Industries Inc. (ARII) and FreightCar America Inc. (RAIL) . Freight rail operator Union Pacific Corp. (UNP) said the "ongoing economic uncertainty" made it difficult to forecast volumes when it cut its fourth-quarter profit estimates last month on bad weather and high fuel prices.

Fearing the worse from a U.S. downturn, investors unloaded shares of industrial bellwethers FedEx Corp. (FDX), down 24% in the last year, and UPS (UPS), off 10%, as well as the shares of most major trucking firms.

U.S. rail freight volume slipped 2.5% in 2007 on diminished demand for housing and automotive materials such as lumber, crushed stone and gravel, and steel, says the Association of American Railroads.

As of Jan. 12, U.S. rail volumes had inched up 0.2%, estimates Deutsche Bank.

"Freight has been in a recession since late 2006," said Bear Stearns analyst Edward Wolfe in a report Friday. Demand has yet to improve. Still, he predicted the sector, which often leads the bottom of the economy by six to eight quarters, would rebound this year.

"Most transport stocks will outperform the broader market this year," he said.

Economic outlook
The recent, sharp decline in the Baltic Dry Index comes after a steep run-up in the past two years. These gains corresponded with continued strong demand from fast-growing economies like China and India for the basic materials used to build infrastructure and manufacture goods for exports. Iron-ore prices reached an all-time high last year, fueling double-digit profit increases at miners like Brazil's Companhia Vale do Rio Doce (RIO) . Higher metals prices stoked economic growth in resource-rich countries such as Peru, Brazil and Australia.

At the Baltic Dry Index's peak, leases on 170,000 deadweight-ton Capesize vessels were fetching more than $200,000 a day.

The index, which is compiled by the Baltic Exchange, does not include liquid commodities like oil or manufactured goods like TV sets. About half of the major shipping routes whose rates are tracked in the index have a component in China, said a spokesman for the Exchange, set up 264 years ago as a marketplace for merchants and ship owners.

The plunge in the index comes as the chance of a recession has risen in the U.S., say economists. They point to a fall in consumer spending late last year, a slowdown in hiring and languishing manufacturing activity.

Export activity has been a bright spot for the U.S. economy thanks to a weaker dollar.

The volume of outgoing containers at the Port of Long Beach, the country's second-busiest port, jumped 22% last year. This increase helped total volume for the year stay stable with the prior year, despite a 0.4% drop in inbound containers.

A wider global slowdown, particularly one that clips demand for U.S. raw materials like wood or metals, could cloud the export outlook.

This week, China and the United Kingdom are scheduled to release reports on gross domestic product for the fourth quarter. BMO Capital Markets expects economic growth in the U.K. slowed to 2.8% growth year-over-year, down from a 3.2% gain for each of the prior three quarters. On Friday, the U.K. Office of National Statistics said retail sales made a surprise drop in December.

"The global economy is still expanding at a pretty good rate," said BMO economist Benjamin Reitzes in Toronto. Still, he said, cooling in Europe and the U.K., combined with a U.S. slowdown, points to more sluggish growth worldwide this year. Even China, which his firm expects will register at least a 11% increase in gross domestic product for the fourth quarter, may slow as the country tries to rein in inflation.

This year, "global growth looks like it will definitely be lower," he said.

QuoteDavid,
What are your thoughts regarding this article?

I have no opinion on that article jrtabor, since the author doesn't disclose how the "PowerRatings" are calculated. From the clues he gives probably it has something to do with "cheap and yet going down" is supposed to be negative, but I'm not sure, so I can't form an opinion.

People continue to see the last year's increase in Shipping services demand as cyclical while I see it as structural. I believe the Dry Bulk Index will never go back to the levels it was in 2004 and 2005:



I have this believe because the BRIC countries are, in my opinion, in a structural development phase which is far from over, even though there will be fluctuations in growth along the way.

With this macroeconomic background TBSI looks incredibly cheap, because it will probably continue to grow earnings over the long term and yet it trades at 6-7 times earnings.

We'll see what the future brings, I'll keep holding TBSI.

Perhaps we'll have a problem with TBSI and $25, but I want to own at least one Shipping services company and TBSI is the most attractive in my opinion.

It looks like earnings estimate for 2008 was raised to 5.02


http://finance.yahoo.com/q/ae?s=TBSI

Quote from: mbaugh on January 25, 2008, 10:00:00 AM
It looks like earnings estimate for 2008 was raised to 5.02

http://finance.yahoo.com/q/ae?s=TBSI

Thanks for the info mbaugh

I've listened to that analysts forum on capital ship link and it was quite interesting. I believe it is clear that the shipping industry fundamentals remain solid and stocks are way undervalued at this point. If my general market outlook proves correct a stock like TBSI should outperform the market in a massive way ... it may even close 2008 above $100.

Certainly this isn't the right time to sell TBSI. I'll keep holding the stock for the long term.

Bought some TBSI today @ $25.44

Last time earnings were Nov 9th so I guess in a few weeks earnings will be out! What are your expectations David?



TBS International Limited Takes Delivery of a Handysize Bulk Carrier Expanding Its Operational Fleet to 37 Vessels
Tuesday January 29, 4:05 pm ET

HAMILTON, BERMUDA--(MARKET WIRE)--Jan 29, 2008 -- TBS International Limited (NasdaqGS:TBSI - News) announced that it has taken delivery of the M.V. Zuni Princess, formally the M.V. Ypermachos, a 1984 built, 28,166 dwt handysize bulk carrier. TBS had agreed to acquire this vessel charter free for $26.0 million in October 2007.


With the delivery of the M.V. Zuni Princess, TBS' current fleet consists of 37 multipurpose tweendecker, handymax and handysize vessels. TBS expects to take delivery of two additional handysize bulk carriers (the MVs Oneida Princess and Mohave Maiden) and three multipurpose tweendeckers (the MVs Hopi Princess, Ottawa Princess and Caribe Maiden) by end of the first quarter of 2008. Once these deliveries are concluded, TBS' fleet will be comprised of 42 vessels with an aggregate of 1,224,523 dwt, consisting of 23 tweendeckers and 19 handymax / handysize bulk carriers.

Joseph E. Royce, Chairman, Chief Executive Officer and President, stated: "We are pleased to add the M.V. Zuni Princess to our operational fleet, our first delivery of this year. With this delivery and consistent with our strategy, we have strengthened our position to take advantage of the growing demand in the industry."

Of all the stocks on the main, TBSI is my favorite.   They took possesion of another ship today since demand is growing  http://biz.yahoo.com/iw/080129/0354475.html                             

4th quarter and year end earnings will probably be released around the first week of March.  Last year it was March 8.

Found an interesting post on the yahoo board



First of all the best way to get info on this stock is to go to www.capitallink.com Yes some of the weakness is contributed to a response from the US slowdown but most recently a lot has to do with the negotiations involving the mining companies and China in regard to iron ore.Iron ore specifically makes up 50% of dry bulk.TBSI's stock price is pretty much dependent on Iron Ore because its major trade routes are from Brazil to China & India, and to a lesser extent Austalia to China.Companies like RIO, RTP, BHP, BBL, and SID ship most of this stuff and use TBSI, and these comanies located in Brazil & Australia
control the world iron ore. Recently a major port in Brazil went down for repairs, and the mining companies are witholding shipmentsto China as a means to get better steel prices in the upcoming contracts. This has freed up ships and the timing of it has coincided with this whole financial mess here in the US which has created this double whammy on the BDI but contracts are longer term in nature, so even though the BDI spot pricing has dropped quite a bit, the long term rates still support the dry bulk shipping fundamentals. Furthermore, eventually these ships will not be held back (and ports will be repaired) which will in turn support the spot pricing which will help TBSI dramatically.Demand should continue to exceed supply for 08 and 09 until 10 when there are a massive number of new ship builds scheduled. What is ironic is that this whole financial mess may actually help this sector.Supply is supposed to exceed demand in 2010. Financing in a tight credit market will probably prevent certain ships from being built. Moreover, the cost of steel may make new ship investments unattractive. Furhtermore, as Chinese labor continues to be tighter, the more expensive it will be to repair old ships and do ship convesions. Lastly to think that China will get these ships done on time (the labor is not as skilled and there are scores of other projects to compete with) is probably wishful thinking. If demand exceeds supply in 2010, these stocks are going to be bid higher, because 3 years of excessive cash flow relative to 2 makes a major differece when TBSI is trading at 4-6 times earnings. All of this is a mute point however if China slows to 5 or 6% GDP.80% of the world's growth this year comes from China and India.If they dont grow at the expected 10/11% they are slated to then all bets are off.Economies do not run in straight lines and although I think China is going to be a long term growth story, the chances are getting increasingly higher that in the next few years there will be a major breather. Whenbuild out slows, iron ore slows, dry bulk shipping rates plummet, and all of that leveraging that TBSI is doing will hurt them immensely and much more than the other
dividend paying ship names (this is why it is down so much relative to SSW or NAT for instance). To think that China will never create a short term bubble at the very least is to think that human nature will not reveal itself once again. The Chinese market was trading at 35 times earnings not too long ago. In 2000 the S&P 500 was trading at he same exact level (and then it got cut in half to 763). Growth generally leads to excess and institutions extend themselves supporting models that end up failing. China will at some point do the same if it is not happening already. Personally I am not so worried about the US recession spilling over to the World, but I am concerned about China popping. So TBSI will continue to be volatile, especially since options just started trading on it this past month. I started buying at 9 (total position got to about 10 million), and cut my position by 60% at 67. I started increasing again at 19/20 but I am wary of it.....if China kicks butt for a couple years, this stock is very very very cheap. Thats the skinny my friends.

I believe this is good news for all the shipping stocks.

http://au.biz.yahoo.com/080130/19/1l5ct.html

BDI is up today as well.

Let's hope it can break that trendline, the volume is certainly there ...

'Run Forrest Run' ! 

Thanks for the tip, David.  Applaud.  I finally bought today at $30.40, after watching since you first bought.  I was just waiting for the techinical analysis to be as good as the fundamentals.  The downtrend has officially broken, it seems.

Sector Snap: Drybulk Climbs Higher
Wednesday January 30, 1:28 pm ET
Drybulk Shippers Float Higher As Baltic Rebounds, Charter Rates Rise, Acquisition Cheered

NEW YORK (AP) -- Drybulk shipping surged for a second day Wednesday, as a key shipping index rebounded and investors regained optimism over rising charter rates and the possibility of further industry consolidation.

The Baltic Dry Index, which is managed by the Baltic Exchange in London, leaped 285 points Wednesday to 5,900 -- a day after it retreated to its lowest point in seven months. The index, which measures drybulk shipping rates on 40 routes across the world, is still well off an all-time high of 11,039 set in mid-November.

Dahlman Rose analyst Omar Notka said while rates for Capesize ships remained flat yesterday, charter rates were heading significantly higher Wednesday morning. Capesize vessels are so named because they are too big to fit through the Panama or Suez Canals and must instead sail around the Cape of Good Hope or Cape Horn to travel between oceans.

"Reports of a five-year Capesize time charter -- the first long-term contract in the Capesize market in some time -- has brought more optimism into the market," Notka added.

And the announcement Tuesday that Excel Maritime Carriers Ltd. plans to buy Quintana Maritime Ltd. in a $2.45 billion cash-and-stock deal has also buoyed investors' hopes that a market rebound is on the horizon, the analyst said.

However, Notka said concerns are still looming over wide-ranging coal production delays in Australia and South Africa, which are slowing shipping activity.

Among drybulk stocks in midday trading, DryShips Inc. surged $5.06, or 8.1 percent, to $67.50, and Quintana Maritime Ltd. rose $1.04, or 4.7 percent, to $23.06.

Eagle Bulk Shipping Inc. gained $1.38, or 5.9 percent, to $24.63, while Diana Shipping Inc. added $1.04, or 3.9 percent, to $27.70.

Navios Maritime Holdings Inc. rose 50 cents, or 4.6 percent, to $11.32, while Excel Maritime Carriers Ltd. gained $1.92, or 6 percent, to $33.70.

Euroseas Ltd., gained 33 cents, or 2.9 percent, to $11.86. The company said earlier Wednesday it locked in one-year charter extensions for two of its container ships.

Danaos Corp. bucked the trend, slipping 10 cents to $27.40.


http://biz.yahoo.com/ap/080130/drybulk_shippers_sector_snap.html?.v=1

Dry bulk CEOs bet on strong year despite recession fears
Thu Jan 31, 2008 7:36am EST

http://www.reuters.com/article/marketsNews/idUKBNG23831620080131?rpc=44&pageNumber=1&virtualBrandChannel=0

By Sakthi Prasad

BANGALORE, Jan 31 (Reuters) - Demand for dry bulk shipments will remain strong this year despite a recent crash in freight rates, growing fears of a U.S. recession, a weak dollar and high oil prices, chief executives of four major dry bulk carriers said at an industry forum on Wednesday.

Demand from China and other emerging economies will offset falling freight rates, the CEOs of DryShips Inc (DRYS.O: Quote, Profile, Research), Star Bulk Carriers Corp SBLK.O, TBS International (TBSI.O: Quote, Profile, Research) and Quintana Maritime Ltd (QMAR.O: Quote, Profile, Research) said at the Dry Bulk CEO Virtual Forum.

The Baltic Exchange's chief sea freight index for dry commodities .BADI, which monitors major trade routes for coal, iron ore, cement and soft commodities such as grain and sugar, lost about 47 percent, since hitting a life high of 11,039 in November last year.

George Economou of DryShips said the profitability would not be affected due to recent fall in freight rates.

"On average, a capesize vessel would be getting $90,000 a day and the expense is about $6,000 a day and there is a huge margin" he added.

Dry bulk freight rates had touched record highs last year, reaching $200,000 levels for capesize vessels, on strong demand from China and other emerging economies and also due to tight supply of vessels.

Quintana's Chief Executive Stamatis Molaris said Baltic Dry Freight Index is an indicator of spot rates only and does not reveal the future freight rate movements.

"It has nothing to do with the real and underlying fundamentals of our business in the long term and volatilities is also part of dry bulk business in the long term," he said.

Molaris also emphasized there is no change in the fundamentals and investors should not use the index to draw long-term conclusions but could use it as a short term trading instrument.

"The fundamentals are still good for 2008, 2009 and beyond and you will see new routes developing," Economou of DryShips said.

"Even if the U.S. economy slows down significantly we are not likely to see much effects in our business," Quintana's Molaris said at the conference organized by New York-based investor relations and financial communications firm Capital Link and Nasdaq International.

Besides recessionary fears, dry bulk freight rates have been hit this year by a lack of fresh cargo supply at two key global export centers and China's ongoing price negotiations for iron ore.

"The demand has been surprising us favourably in the past and we will see it again, said Chief Executive Akis Tsirigakis of Star Bulk.

OIL, DOLLAR AND SUB-PRIME

The belief that rising oil prices can eat into a shipper's margins was dispelled by Tsirigakis, who clarified that oil is not part of a shipper's cost structure.

"The oil costs are passed on to the charterers and is not part of our cost structure and hence it do not affect us," he said.

Joseph Royce of TBS International said he is continuing to see increasing exports, especially of coal and agricultural products, from the U.S., as they become cheaper due to a weaker dollar.

Royce also added that infrastructure development, which in turn propels demand for dry bulk commodities like iron ore and coal, would continue as project business is booming throughout the world.

Economou of DryShips said the sub-prime mortage-led credit crunch has not affected the companies' operations.

"The only way we are suffering from credit crunch is in the price of the stocks, which has been unnecessarily hurt.

"The fundamentals have not changed and deals are going to be there and you saw one announced yesterday," he said, refering to Excel Maritime Carriers Ltd (EXM.N: Quote, Profile, Research) $2.45 billion buyout of Quintana Maritime.

Quintana's Molaris said his company's sale to Excel Maritime is a huge confidence booster to the shipping market and that right projects will always be financed.

VESSEL SUPPLY

Dry bulk carriers have ordered more ships to meet the growing demand to ship dry bulk commodities to China, India and other emerging economies, which is expected to hit the seas in the next two to three years.

Molaris said the rise in the orderbook to build new ships was spurred by the booming demand and admitted he was sceptical about the rising supply of ships but added that shipyards are constrained with orders.

"We are currently experiencing delays in delivering ships on time from well established shipyards," he said. (Reporting by Sakthi Prasad in Bangalore; Editing by Jarshad Kakkrakandy)

Thanks for posting these articles Se7en

I didn't thought it was possible for stock prices and fundamentals to diverge so much like it happened with the Shipping sector (at least not to the downside), but I guess I just wasn't experienced enough.

Now I know that it is possible for a multiple contraction to bring a stock down to 1/3 or less of its previous value and that a earnings multiple of 3 to 5 is possible even as fundamentals keep improving as is clearly the case with the Shipping industry.

I guess this is the way Bull and Bear Markets exist, through multiple expansions and contractions.

Anyway, I see the current jump in TBSI and other shipping stocks as an early bullish signal for this market, even though the path still isn't clear.

We'll see what happens next but anyway it goes, TBSI depends mostly on commerce between Latin America and Asia and I believe that will keep growing. Whenever a multiple expansion occurs TBSI will be a $100 plus stock and I'll continue holding it for the long term.