Bloomberg News

Shipping Crash Survivor Turning Profit as Fleet Expands: Freight

January 12, 2012

Jan. 10 (Bloomberg) -- At a time when shipping companies hauling commodities are still contending with the industry’s worst-ever slump, Precious Shipping Pcl plans to almost triple its fleet in a bet the crash in vessel prices is bottoming.

The company, the only one of 14 members of the Bloomberg Dry Bulk Shipping Pureplay Index forecasted by analysts to report higher profits in 2011 and 2012, will buy 21 new and 20 secondhand vessels, said Bangkok-based Managing Director Khalid Hashim. Precious Shipping has 25 carriers, mostly handysizes holding up to 35,000 metric tons of cargo. Investors may profit because its shares will rise 12 percent to 18.44 baht (58 U.S. cents) in 12 months, the average of 15 analyst estimates compiled by Bloomberg show.

Precious Shipping is increasing earnings because of its contrarian strategy. When rivals ordered a record number of new handysizes in 2007 after rates almost doubled, the company sold 10 carriers. Prices of secondhand vessels plunged as much as 63 percent since then as capacity exceeded demand. While rates may take at least another two years to rebound, ship prices are now low enough for acquisitions, Hashim said.

“Once the market turns around, we’ll have a huge fleet bought at very low prices,” said the 58-year-old executive, who has worked in shipping for more than three decades. “We buy ships at what we think is the right time at the right price.”

Handysize rates averaged $10,552 a day in 2011, 36 percent less than a year earlier, according to the London-based Baltic Exchange, which publishes freight costs for more than 50 maritime routes. That was better than the 44 percent decline in the average level of the Baltic Dry Index, a composite of returns on handysizes and three other classes of vessels hauling coal, iron ore and grain.

Operating Costs

Nineteen of Precious Shipping’s vessels are owned outright, reducing their break-even rate, Hashim said. Its carriers have an average daily operating cost of $4,650, with 74 percent of capacity trading in the spot market and the remainder on longer- term charters, he said. Forward freight agreements, handled by brokers and used to bet on future transport costs, anticipate average earnings of $7,967 this year and $8,388 in 2013, Baltic Exchange data show.

The cost of a five-year-old handysize fell 25 percent to $19 million in the first 11 months of 2011, according to the latest data from London-based Simpson, Spence & Young Ltd., the world’s second-largest shipbroker. Values averaged $39.6 million in 2007, the data show. Each ship is about 650 feet long and as much as 100 feet wide.

New Vessels

Precious Shipping sold another 25 vessels from 2009 through 2010, bringing a total profit from asset sales of about $80 million, Hashim said. It bought four secondhand carriers last year and sold four of its 18 contracts for new vessels for an average profit of $4 million each, he said. The contracts were agreed on with a shipyard in 2007 and 2008.

The company will report a 37 percent gain in net income to 1.50 billion baht for this year, according to the median of 15 analyst estimates compiled by Bloomberg. STX Pan Ocean Co., the biggest member of the Bloomberg Dry Bulk Shipping Pureplay Index, will report a net loss of $3.07 million and profit at D/S Norden A/S, second-largest in the gauge, will drop 42 percent to $57.6 million, the median of estimates shows.

There are no signs of a rebound yet. Handysize rates dropped 3.1 percent to $8,062 so far this year on mounting concern that growth is slowing. Global trade in goods and services will expand 5.8 percent this year, down from 7.5 percent in 2011, the International Monetary Fund estimates. About 90 percent of world trade moves by sea, the Round Table of Shipping Associations estimates.

Iron Ore

Total demand for dry-bulk cargoes, which include iron ore and grain, will advance 3 percent in 2012, slowing from 5 percent last year, according to London-based Clarkson Plc, the world’s biggest shipbroker. Iron ore is the second-biggest commodity cargo after crude oil.

Handysizes are missing out on strengthening demand for ore from China, the biggest buyer, as importers favor larger vessels. Rates for capesizes, hauling about 160,000 tons of cargo, rallied 56 percent since the start of August as handysizes declined 18 percent, Baltic Exchange data show.

Ten percent of handysizes are bound for China in the next month, compared with 21 percent of capesizes, ship-tracking data compiled by Bloomberg show. The country’s economy will grow 8.5 percent this year, more than four times the anticipated 2.1 percent expansion in the U.S., according to the median of as many as 70 economist estimates compiled by Bloomberg.

Fleet Capacity

While capesizes may have beaten handysizes since August, they’ve done worse so far in 2012, tumbling 47 percent to $14,535 on the Baltic Exchange. Shipping rates are volatile, with capesize costs moving 16 percent or more in each of the past 22 months and doubling in three of them in terms of the difference between monthly high and low levels.

Weaker fleet-capacity growth was one reason the smaller vessels were less volatile. The number of handysizes rose 11 percent to 2,640 since the end of 2007 as the capesize fleet expanded 58 percent to 1,186 ships, according to data from Redhill, England-based IHS Fairplay.

The Bloomberg Tanker Index of the six largest U.S.-listed owners plunged 55 percent in the past year, compared with an 8.7 percent decline in the MSCI All-Country World Index of equities. The Lloyd’s List/Bloomberg Index of the 50 largest container lines dropped 36 percent as the Bloomberg Dry Bulk Shipping Pureplay Index fell 44 percent.

Shares of Precious Shipping beat all the vessel indexes, retreating 11 percent. They will have a dividend yield of almost 4.1 percent this year, compared with 3.2 percent for the Bloomberg Dry Bulk Shipping Pureplay Index, analyst estimates compiled by Bloomberg show.

“The reason they were able to maintain their strength and cash flow is they didn’t diversify and expand like crazy,” said Youssef Abboud, a senior shipping analyst at Thanachart Securities Pcl in Bangkok. “This is when you want to buy, when you’re buying new vessels at secondhand prices. When things turn around, the return on invested capital will skyrocket.”

--Editors: Stuart Wallace, Dan Weeks.

To contact the reporter on this story: Isaac Arnsdorf in London at iarnsdorf@bloomberg.net

To contact the editor responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net


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