MAYBULK : Baltic Dry Index continues to fall

Last Friday, the Baltic Dry Index, which tracks the cost of carriage of dry bulk goods such as iron ore, coal and grain, slipped 71 points or 3% to close at 2,280 points.

This is the lowest the index has traded since early October last year, and the dip last Friday marked 26 consecutive days of decline, its longest losing streak since August 2005.

Since the slide started at end-May, the benchmark index has shed some 45% of its value.

The Baltic Dry Index is largely considered an indicator of future economic growth or a slowdown leading to recession, since the raw materials on which the index is based on, has a little potential for speculative operations.

There are several reasons for the slump in the Baltic Dry Index, chief of which is a slowing demand for iron ore from China.

Chinese customs records indicate that a record 78 million tonnes of iron ore may have been imported in June, resulting in slower demand over the next few months as stockpiles are used up.

Demand for iron ore, which is the raw material to make steel, also could slow as the Chinese government looks to curb inflation and cool the country’s property sector.

Iron ore is the largest dry bulk commodity carried at sea, accounting for some 30% of all cargoes, meaning that a slowdown in iron ore imports will adversely impact the Baltic Dry Index.

Other reasons for the gloomy outlook for the Baltic Dry Index include the grain season ending in South America, which has resulted in a glut of bulk carriers.

Grain shipments slow from end-April before picking up in August to October, when the harvest season commences.

Adding to the woes is the strong delivery of new ships, which were ordered in 2008 when the Baltic Dry Index was at record highs, testing the 11,800-point mark in May, before tumbling more than 90% to a low of 663 points on Dec 5, 2008.

Tufton Oceanic Ltd, which manages the world’s largest shipping hedge fund, has speculated that the world’s fleet of dry bulk carriers may grow by as much as 17% this year, which could drive rates down further.

Late last month, analysts at Oslo-based Fearnley Fonds ASA, Rikard Vabo and Lars Erich Nilsen, had said: “As of now there is no indication of any upswing in rates”, which could indicate a long spell of red on the Baltic Dry Index and for companies involved in dry bulk shipping.

On the local front, the two main bulk players are tycoon Robert Kuok Hock Nien’s Malaysian Bulk Carriers Bhd (Maybulk) and Sarawak-based Hubline Bhd.
Unlike Maybulk, which has large bulkers and tankers, most of Hubline’s container and bulk vessels are smaller in size.

In April this year, in response to emailed questions on the outlook, for the Baltic Dry Index from The Edge Financial Daily, Kuok Khoon Kuan, Maybulk’s CEO had said: “We are generally cautious about the market.

“We have to be mindful that the global recovery is fragile, there are prospects of the removal of government stimuli and coupled with the fact that there are the substantial new buildings to be delivered over the years... It can very easily go wrong,” he had said.

Maybulk’s fleet is made up of 15 vessels (including long-termed chartered vessels and jointly-owned ships), 12 of which are bulk carriers and three tankers.

However, possibly anticipating the downturn, Maybulk had ventured into oil and gas support services in 2008, acquiring 21.23% of Singapore-based PACC Offshore Services Holdings Pte Ltd (Posh) for US$221 million (RM713.83 million).

“Maybulk’s share of post-acquisition profit in 2008 was RM4.3 million whereas in 2009, this increased to RM63.9 million. It was a timely and sound investment,” the company said in its latest annual report for the financial year ended Dec 31, 2009 (FY09).

Kuok, in his emailed response to The Edge Financial Daily on the Posh acquisition had said: “Given the losses suffered in certain other shipping sectors, the board and the shareholders are happy with the investment decision to diversify into a sector that has continued to be profitable.”

For the first three months of FY10 ended March 31, Maybulk posted a net profit of RM51.36 million on the back of RM114.43 million in revenue.

In contrast to a year earlier, net profit surged close to 250%, while revenue gained by about 117%.

The company’s net tangible asset as at end-March stood at RM1.79 per share.

In the notes accompanying its financials, Maybulk said the average dry bulk time charter equivalent (TCE) achieved for 1QFY10 was US$30,263 per day, which is an increase from TCE achieved in the last quarter of 2009 of US$22,093 per day.

Maybulk ended trading on Friday at RM2.88, gaining one sen.



Written by Jose Barrock
This article appeared in The Edge Financial Daily, July 5, 2010.