October 2017: Dry bulk market on strong footing, while tanker/gas shipping rates up on seasonal demand.
Global yields reached their lowest levels in a year this September, driven by the sustained low interest rate environment and the stimulus imposed by global central banks. As we move towards a higher interest rate environment, particularly in the US, along with a reduction in quantitative easing for the Euro area, yields are expected to gradually rebound. An increasing number of companies have taken advantage of the low rate environment by tapping public debt markets. This comes at a time when the availability of funds from banks is declining as increased regulatory pressures are forcing these institutions to increase impairments associated with shipping loans. Bonds issued by the companies that operate in the dry bulk and container shipping sectors have benefited the most YTD, in line with an improvement in freight rates for the sectors. Bonds issued by tanker companies have underperformed, losing 2.86% on average since the start of the year.
The Baltic Dry Index has moved up 10% over the last one month, and 60% since the start of 2017. Chinese steel production had been firm so far this year, boosting the iron-ore imports by the country. Freight rates across vessel segments have moved up significantly, especially for Capesize vessels as TCE earnings are now above USD 20,000pd. Stronger rates have also benefited stock prices, with Star Bulk Carriers and Golden Ocean leading the rally this year. However, over the last month, dry bulk stocks have retracted on concerns over credit tightening and steel production cuts by China.
The tanker market remained weak because of a deluge of newbuild deliveries that outpaced the demand growth. The freight rates were well below the break-even rates across vessel classes in the third quarter of this year. The TCE rates for crude tankers, particularly in the VLCC and Aframax segments, reflected an increasing trend ahead of the improving winter demand and record US crude exports. However, time charter rates are declining, indicating a weak outlook for the crude tanker market in the medium term as newbuilding deliveries remain a problem for the tanker market.
Spot rates for LNG ships moved up on the back of the winter restocking demand, and a widening of the arbitrage between the US and Asian gas prices. In the LPG shipping space, spot rates for VLGCs have improved, helped in part by normalisation of US exports after Hurricane Harvey. Better rates spurred the gas shipping stocks higher over the last one month.
Spot rates are up on average 43% y/y although the most recent numbers in September are less flattering when compared on a y/y basis. This is principally because the comparison with September 2016 suffers from a higher base effect as this was immediately after the bankruptcy of Hanjin, which took place on 31 August 2016. As expected, the third quarter was seasonally strong, with most of the major liner operators reporting robust revenue growth. For instance, the Taiwanese operators – Evergreen, Wan Hai and Yang Ming – posted revenue growth of 30%, 15% and 23% y/y for this period, reflecting the resilience of the liner industry this year. However, amid the orders of super-sized containerships from CMA CGM and MSC, the supply overhang could come back to haunt the industry.
Global throughput growths in 3Q17 were encouraging, setting the stage for a strong earnings season for port companies. Investors are pricing in an 8% earnings growth for the year, as our proprietary, Drewry Port Index, trades at 20.8x P/E against the three-year average of 19.2x P/E.
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