With the prospect of loss-inducing rates for at least the next two years in a fully formed and historical market collapse, a long line of listed dry bulk carriers will be drained of capital during 2015 and will thus be forced to tap the capital market in order to secure liquidity as a growing number of carriers are unable to comply with their existing credit agreements and with booked asset values in free fall.
A new analysis from Norway's Pareto Securities draws the image of a severely disappointing 2014 that has been replaced by a disastrous beginning to 2015, with the prospect of only moderate market improvements in 2016 and 2017.
With Denmark's D/S Norden and New York-listed Diana Shipping as the only exceptions with the most robust balances, Pareto Securities points to significant risks that dry bulk carriers, led by, for instance, equity fund-owned Star Bulk and John Fredriksen-controlled Golden Ocean, will have to tap the lending markets or issue new shares with negative consequences for the already diluted share prices.
The international dry bulk market has collapsed to a 30-year low, and the Norwegian brokerage and analyst agency estimates that 2015 could be the worst year in recent memory, a development especially driven by fundamental changes to Chinese economy, which has sustained the dry bulk market for more than a decade.
China's steel production and iron ore import is currently down one percent in the first months of 2015 compared to the same period 2014, while the coal import has dropped 45 percent in the past year.
Source: Pareto Securities Equity Research
In the first three months of 2013 the spot rates for the major Capesizes, the locomotives the dry bulk industry, have hovered around an average of USD 5,000 per day, while smaller ship types such as Supramax have also been hit by the collapse, sailing at the lowest quarterly rates since 2002.
For Capesize, Pareto lowers its projections for rate developments in 2015 and 2016 to USD 10,000 (previously 18,000) and USD 13,000 (previously 20,000), respectively.
The new Golden Ocean Group, a merger of the two Fredriksen companies Golden Ocean and Knightsbridge, was settled recently, just before the 2nd quarter 2015, which according to Pareto could be the worst year dry bulk ever. The new company has a fleet of more than 70 vessels, of which 34 are brand new eco-design Capesizes, and 21 newbuildings set for delivery over the next 18 months.
"Drybulk values are in free fall, and many owners will struggle with balance sheets going forward. Golden Ocean is no exception, though a strong majority owner provides comfort fundingwise. Yet, the current above NAV-valuation on falling asset values is not sustainable in our view," concludes Pareto, which holds a sell recommendation on the share and which does not rule out a need for additional capital injections.
The analyst agency holds the same recommendation for Star Bulk, which in January this year raised USD 242 million dollars, but the weak bulk market could trigger a new capital need for the carrier. The Star Bulk share dropped significant value in 2014 and slid another 45 percent in the first months of this year. The carrier's fleet stands 98 vessels.
Things seem to be looking less bleak for Western Bulk, even though the share has been knocked down 65 percent in less than one year and in spite of the company's significant expenses related to Japanese leasing contracts with the delivery of more new ships. The Western Bulk Chartering division has presented decent results for January and February this year, while the WB Shipholding division has pulled the result down.
The two exceptions
Numerous shipping analysts point to Greece-based Diana Shipping as the strongest dry bulk carrier on Wall Street, and as one of the few - if not the only - carrier who never succumbed to the growing dry bulk optimism back in 2013 and 2014 - an optimism that now represents one of the key reasons for the industry's current deroute.
According to Pareto, D/S Norden has the strongest balance in the sector among the dry bulk carriers covered by the analyst agency. And the Danish carrier is currently benefiting from its investments in the medium-size MR product tankers.
"Norden will manage through the crisis without printing a single share," notes Pareto.
Seven US dry bulk shares saw their share values cut significantly about a month ago by US-based financing house Morgan Stanley, while Deutsche Bank in New York shaved the dry bulk shares down in late 2014.