Baltic Dry Index Makes Impressive Rebound

The Baltic Dry Index surged another 5% to close at 945. (Do remember that the recent low was around 600+ a month ago!)

And if you look at the recent three month charts of the BDI, the rise has been impressive.

However, many are still not impressed at all.

Published last week: Baltic Dry Index rebounds; shipowners not enthused

• Bangalore: Indian shipowners are laying up more vessels that carry dry bulk commodities such as coal, iron ore, steel and grains, and even cancelling orders for new ships despite a rebound in the London-based Baltic Dry Index (BDI), a key measure of the health of global trade.
  
  Last week, Great Eastern Shipping Co. Ltd, India’s biggest private ocean carrier, cancelled orders for two new mid-sized dry bulk carriers it had placed with China’s Cosco Shipyard Group.
  
  State-run Shipping Corp. of India Ltd (SCI), India’s biggest shipping firm, has most recently laid up one more of its dry bulk carriers—the 12-year-old Maharashtra—that was due for dry docking and special survey. In December, SCI had laid up the 23-year-old dry bulk ship Lok Maheshwari, which was also due for dry docking and special survey.
  
  Lay-up is a shipping term that means temporary cessation of trading of a vessel by the shipowner.
  
  Apart from routine annual maintenance, a ship has to undergo dry-docking twice in five years and a special survey every four years to be allowed to operate under global maritime regulations.
  
  Firms that until a few months ago ran their old dry bulk carriers after undertaking dry docking, surveys and renewals are now reconsidering investing Rs5-6 crore for such an exercise because falling rentals no longer can cover operating expenses. The latest lay-ups and order cancellations come in spite of the BDI bouncing back.
  
  On Wednesday, the index climbed 9 points to 920 points from 911 points on Tuesday.
  
  The index, which measures costs for shipping dry bulk commodities such as coal, iron ore, steel and grains, had plunged to to 663 points in December from a record level on 20 May, pushed down by a credit squeeze and waning demand for global trade.
  
  Frozen credit lines have paralyzed the shipping trade since mid-September, drastically reducing shipments and, in turn, the use of dry bulk carriers.
  
  A lack of access to letters of credit, in which banks guarantee payment for merchandise, added to the problem.
  
  As for the recent rally in the BDI, experts are hesitant to read it as an indicator that the market has turned.
  
  “It is not a sustained rally as of now,” said T.V. Shanbhag, group adviser to India’s biggest ship-broking firm, Mumbai-based Trans Ocean Agency Pvt. Ltd. “It is momentary. The problems with letters of credit persist.”
  
  He added that given the extent of the fall over the past few months, a minor improvement of even 5% or 10% will not make a difference.
  
  Others, however, suggest the sharp fall was inevitable because the index had been heavily oversold.
  
  “As a result, even some positive development could lead to some kind of a recovery in the sector,” K. Ramachandran, chief investment officer at Barclays Wealth, the wealth management business of Barclays Bank Plc., said by phone from Mumbai. “It could be a technical bounce-back.”
  
  Conditions should become clearer when China, the world’s biggest importer of iron ore, completes price negotiations with suppliers for its new annual contract beginning February, said Ramachandran.

On the very same day, this was posted on Bloomberg News. Half of Commodity Shippers May Breach Loans by April, RBS Says

• By Alaric Nightingale
  
  Jan. 14 (Bloomberg) -- As many as half of publicly traded commodity shipping lines may breach their loan covenants by April after a record collapse in hire rates, according to Royal Bank of Scotland Group Plc, the third-largest lender to the industry.
  
  The cost of second-hand capesizes, the largest group of commodity carriers, plunged 70 percent last year, according to the Baltic Exchange in London. Fleet values are one of the key covenants used. Banks review loans as often as every quarter, Lambros Varnavides, the bank’s head of credit to the shipping industry, said in interviews in London on Jan. 12 and 13.
  
  “It’s hard to avoid a breach when asset values have fallen so significantly,” said Varnavides, who is global head of shipping. Assuming rates and values don’t rebound in the next several months, shippers in breach of covenants will likely have to renegotiate loans, he said.
  
  The Baltic Dry Index, a measure of shipping costs for commodities, slumped 92 percent last year, causing at least four shipowners to fail since October. Demand for raw materials plunged as Europe, Japan and the U.S. entered their first simultaneous recessions since World War II.
  
  The ratio of losses on RBS’s shipping loans has averaged about 0.03 percent in the last 15 years and that’s “not going to change much” in the “long run,” Varnavides said. The bank has lent $25 billion to shippers, of which $18 billion has actually been used. About 60 percent is financing oil and gas tankers.
  
  “We remain confident in the quality of our portfolio and there’s a benefit of loans being re-priced higher,” the managing director said.
  
  About a third of closely held coal, ore and grain shippers may also be close to breaching loan covenants, Varnavides said. Most banks will be more interested in maintaining their relationship with shippers than seeking the highest possible interest rates when renegotiating loans, Varnavides said.
  
  Shipping Loans
  
  “In many ways, it’s an old-fashioned business, it has old- fashioned virtues,” he said.
  
  Loans to shipowners are being made at 200 to 300 basis points over the London interbank offered rate, compared with less than 100 points about 18 months ago, Varnavides said. A basis point is 0.01 of a percentage point and Libor is the rate banks say they charge each other for loans.
  
  RBS is the third-largest lender to owners based on how many shipping loans it holds directly. HSH Nordbank AG and DnB NOR ASA are the biggest, Varnavides said.

Yes that was last week and perhaps those two articles were rather stale.

The following news was posted yesterday on Reuters on Dryships. Dryships suspends dividend, dumps expansion plans

• By Arup Roychoudhury and Adveith Nair
  
  BANGALORE, Jan 22 (Reuters) - Greek bulk carrier Dryships Inc (DRYS.O) said it would suspend its dividend, cancel previous ship orders and sell some ships as it strives to preserve capital, sending its shares down as much as 20 percent.
  
  The company also forecast fourth-quarter earnings before special items to be below market estimates citing weakness in the drybulk market and charges associated with the actions announced today.
  
  Dryships said lower freight rates and a tighter credit market was forcing it to take the actions which are aimed at reducing capital expenditures by over $1.5 billion.
  
  The Baltic Exchange's chief sea freight index .BADI, which monitors prices to ship key dry commodities, has fallen more than 90 percent from the highs it touched in May 2008.
  
  Shares of the company, which have lost 88 percent of their value from the highs touched in May, were down more than 17 percent at $11.98 in afternoon trade on Nasdaq. They had earlier touched a low of $11.70.
  
  Jefferies & Co analyst Douglas Mavrinac said Dryships' biggest challenge was maintaining its balance sheet strength and the cancellation announced today will bolster its balance sheet quite dramatically.
  
  "When the market digests the positives out of this, they'll realise the news was actually quite good."
  
  "The big positive... is the fact that they are saving a billion and a half dollars going forward." he added.
  
  DEAL OFF
  
  Dryships said it was cancelling the purchase of nine Capesize vessels, which are the largest type of ships that can haul dry bulk commodities like iron ore, coal and grains due to the "considerable decrease" in the asset values .
  
  An abrupt end to the recent boom for bulk shippers has left many laden with debt for ships they bought at the top of the market. They now owe more than their ships are worth.
  
  The company had agreed to buy these ships in October 2008 for $1.17 billion from clients of Cardiff Marine Inc, including affiliates of Dryships' Chief Executive George Economou, and some third parties.
  
  Cardiff Marine, which was founded by Economou, provides technical and commercial ship-management to Dryships.
  
  The consideration to cancel the transaction will consist of the issuance of 6.5 million shares, the company said.
  
  Dryships has also agreed to dispose three capesize newbuilds. The agreement will release it and its relevant subsidiaries from the purchase agreements for these vessels.
  This agreement will also lower the company's total obligations in the amount of $364 million in exchange for a total consideration of $116.4 million.
  
  The financial crisis that started last year and evolved into a global economic crisis has forced the dry bulk shippers to drastically cut down on their expansion plans.
  
  In December, Dryships also cancelled a $400 million purchase of four Panamax vessels, and a month earlier rival Genco Shipping & Trading Ltd (GNK.N) agreed to cancel a deal to buy six dry bulk vessels.
  
  DIVIDEND SUSPENDED
  
  Dryships said beginning with the fourth quarter it has suspended dividend payout of 20 cents a share.
  
  In the past month a slew of other dry bulk shippers, including Diana Shipping Inc (DSX.N) and Eagle Bulk Shipping Inc (EGLE.O) have suspended their dividends to preserve cash.
  
  Analyst Mavrinac said the dividend suspension was expected. "I don't see the company resuming dividend in the near future. It was a token dividend in the first place," he added.
  
  Analyst Gregory Lewis of Credit Suisse said Dryships was different from other drybulk players and was never considered a yield investment.
  
  WEAK OUTLOOK
  
  For the fourth quarter, Dryships forecast a net loss of $380.6 million to $431.4 million, or $6.89 to $7.81 per share.
  
  Excluding items, the company expects a net income of $34.7 million to $39.3 million, or 63 cents to 71 cents per share.
  
  Analysts on average, were expecting a profit of $1.28 per share, on revenue of $225.3 million.
  
  Analyst Mavrinac said while the outlook was below expectations, it wasn't "overly surprising," seeing as how challenging the markets were in the fourth quarter.
  
  Credit Suisse's Lewis said the weakness in the dry bulk market would continue for the majority of 2009.
  
  "We are going to see demand actually pick up later in the first and the second quarters." The issue is a lot of new supply coming into the market, which keeps dayrate in a low to mid cycle level.

Not trusting these news?

Well here's a report that you could read. It's posted on reportLinker.com and do note that it's not free: Global Dry Bulk Shipping Industry: An Analysis