Norden Profits From Cargo Strategy Even With Rate Slump: Freight

Billionaire John Fredriksen
John Fredriksen, the billionaire who founded tanker company Frontline Ltd., ordered as many as 10 of the ships in February. Photographer: Jean Ayissi/HEIKO JUNGE/AFP/Getty Images

D/S Norden AS, Europe’s largest commodities shipping company, is booking more cargo than its fleet of Panamax vessels can carry, a strategy to make money even with the lowest vessel rates since 2002.

The Hellerup, Denmark-based company’s freight accords for this year are equal to 121 percent of its Panamax capacity, a May 15 filing showed. Norden will profit if it hires the extra ships at prices below those agreed to with clients, according to RS Platou Markets AS, an investment bank in Oslo. Rates plunged 22 percent since the start of January.

Shipping companies are contending with rates that tumbled 89 percent from their most recent peak in May 2008, a slump that reflects a glut of new ships rather than less cargo. Some owners are responding by anchoring the most vessels in at least four years, while others are cutting speeds to save on fuel costs, the biggest operating expense. Norden’s strategy may propel its shares 30 percent higher in the next 12 months, the average of six analyst estimates compiled by Bloomberg show.

“Norden is unique among listed shipping companies because it can adjust to the market more effectively, especially in a challenging market,” said Martin Korsvold, an analyst at Pareto Securities ASA in Oslo whose recommendations on the shares of shipping companies returned 19 percent in two years. “This strategy is a way to reduce risk in a bad market.”

Baltic Exchange

Daily earnings for Panamaxes, the largest ships to navigate the Panama Canal, averaged $8,963 so far this year, the worst for the period since 2002, according to the Baltic Exchange, a publisher of costs along more than 50 trade routes. Rates for the 750-foot vessels, hauling everything from coal to grains, will drop 21 percent to an average of $11,000 this year, according to the median of 10 analyst estimates compiled by Bloomberg.

Norden operates 41 Panamaxes, accounting for 35 percent of its dry-bulk commodity fleet by capacity, according to data on the company’s website. Its shares advanced 14 percent to 153.4 kroner ($26.38) in Copenhagen this year and will reach 199.17 in 12 months, the analyst estimates show. The Lloyd’s List-Bloomberg Top 50 Shipping Index Value of the largest companies rose 0.4 percent since the start of January.

The company manages its dry-bulk fleet as a single unit and has agreed to contracts covering 81 percent of combined capacity, Chief Executive Officer Carsten Mortensen said in an interview. Norden can hire more ships on short-term leases to change its carrying capacity, he said.

“We are well covered to prepare for a bumpy ride this year,” Mortensen said by phone on May 16. “If the market goes up, our cover will reduce.”

Fleet Value

While the company can adjust in response to rates, there’s less it can do about asset values. The price of a five-year-old Panamax slumped 30 percent last year, according to Simpson, Spence & Young Ltd., the world’s second-largest shipbroker.

Norden announced a $300 million writedown on May 15 to reflect the value of its fleet. Its shares fell 0.3 percent and all eight analysts who issued research notes reiterated recommendations to own the stock, indicating analysts and investors were anticipating the change.

This year’s average rate of $11,000 anticipated by analysts would be below the $13,000 that most owners need to break even. The global fleet expanded 42 percent since the end of 2008 and outstanding orders at ship yards are equal to 35 percent of existing capacity, the most of any dry-bulk vessel class, data from Englewood, Colorado-based research group IHS Inc. show. The Panamax fleet will expand 14 percent in 2012, according to Clarkson Plc, the biggest shipbroker.

Shipping Associations

The gains overwhelmed a jump in seaborne volumes of dry-bulk commodities, which London-based Clarkson estimates will reach a record 3.85 billion metric tons this year, 20 percent more than in 2008, when Panamax rates most recently peaked. About 90 percent of world trade goes by sea, according to the Round Table of International Shipping Associations.

Norden’s other dry-bulk carriers are also contending with declining rates. Its Capesizes, the largest ships hauling iron ore and coal, have enough cargo booked for 53 percent of their available voyages, company data show. That may indicate Norden is refraining from locking in rates now, expecting them to rise in the second half of the year, said Herman Hildan, an analyst at Platou in Oslo.

Daily Capesize earnings plunged 68 percent to $8,841 this year, after more than doubling in the second half of last year, according to the London-based Baltic Exchange. Forward freight agreements, traded by brokers and used to bet on future costs, anticipate a rebound, with fourth-quarter rates being traded at $14,325, or 62 percent more than now, Clarkson data show.

Cargo Agreements

In contrast to dry bulk, Norden has cargo agreements covering 20 percent of its fleet of oil-product tankers for this year. The rest will compete for single-voyage contracts because rates will probably gain, Mortensen said. Tankers accounted for 20 percent of the company’s revenue in the first quarter, data compiled by Bloomberg show.

Medium-range tankers, each carrying about 13 million gallons of fuels, will earn an average $14,657 a day this year, 17 percent more than in 2011, according to the median of 10 analyst estimates compiled by Bloomberg. The global fleet will expand 3.9 percent as demand advances 3.8 percent, Clarkson estimates.

John Fredriksen, the billionaire who founded tanker company Frontline Ltd., ordered as many as 10 of the ships in February. Wilbur Ross, whose company manages about $10 billion of assets, joined a group buying 30 product tankers in September.

Medium-Range Tanker

The cost of a five-year-old medium-range tanker was unchanged at $25.4 million last year, according to Clarkson. That compares with the slump in Panamaxes to $26.3 million, from $37.8 million at the end of 2010, London-based Simpson, Spence & Young estimates.

Panamax owners are responding by anchoring ships or slowing them down to extend the length of voyages. The average vessel sailed at 8.8 knots last month, compared with 11.2 knots four year earlier, and an average of 515 were anchored last month, from 193 in May 2008, according to data compiled by Bloomberg. Each of the ships can hold 80,000 tons of cargo.

Norden will report net income of $12.6 million for this quarter and profit for each of the next two quarters, according to the mean of as many as seven analyst estimates compiled by Bloomberg. It reported a first-quarter loss of $255.9 million after reducing the value of its fleet.

“Norden wants to ensure we have reached the bottom and then will start to become more and more open to the market,” said Nikolaj Kamedula, an analyst at SEB Enskilda in Copenhagen whose recommendations on the shares of shipping companies returned 13 percent in the past six months. “This year is not the year we’re going to see a return in the dry-bulk market.”

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