Swaps Diverge from Stock Analysts Seeing Rally in Ships: Freight
At a time when equity analysts are predicting the biggest rebound in earnings for Capesize iron-ore carriers in six years, swaps traders are betting that rates in 2013 will be the second-lowest on record.
Capesize earnings will rise 58 percent to $12,250 a day next year, the median of nine analyst predictions compiled by Bloomberg shows. Shares of STX Pan Ocean (028670) Co., with the highest proportion of Capesizes among the five largest owners, will gain 18 percent in a year, based on the average of 15 estimates. Forward freight agreements, used to bet on future rates, anticipate $8,914, or 15 percent above this year’s record-low average of $7,739, according to shipbroker Clarkson Plc.
Rates plunged 74 percent in 2012 as ship owners contended with a glut caused by the biggest fleet expansion in history. Equity analysts are more bullish for 2013 amid London-based Clarkson’s prediction that capacity gains will exceed demand growth by the least in a decade. Swaps slumped 13 percent in the past month as traders reacted to a spot-rate index that fell because of concern that China, the biggest iron-ore buyer, is slowing and as Europe and Japan tumbled back into recessions.
“You’ve got the immediate pressure of an index that’s losing a thousand dollars a day every day, and that has an impact on the overall thinking” for 2013, said Philippe Van Den Abeele, the London-based managing director of Castalia Fund Management (U.K.) Ltd., an adviser to a hedge fund trading swaps. “The lowest year will be 2012. The extent to which it has capability of rising, that’s the question.”
Earnings for single-voyage charters fell in 18 of the past 19 sessions, plunging 63 percent to $6,239 by Dec. 14, according to the Baltic Exchange, the London-based publisher of freight costs on 61 routes. The rates anticipated by both equity analysts and swaps traders would still be below the at least $15,500 that Pareto Securities AS, an Oslo-based investment bank, says Capesize owners need to break even.
Fleet capacity will expand 4.8 percent next year while demand advances 4.1 percent, the smallest difference since 2003, Clarkson data show. China, which buys 65 percent of all seaborne iron-ore cargoes, will import a record 778.2 million metric tons next year, from 728.3 million tons in 2012, according to the median of 10 analyst estimates. The extra volume is equal to 312 voyages for the Capesize fleet of 1,482 ships.
Iron-ore prices at the Chinese port of Tianjin advanced 52 percent to $132.20 a ton since Sept. 5 as economic growth accelerated after slowing for seven quarters. The country imported 65.78 million tons last month, the most since a record amount was bought in January 2011, customs data show. Its steel output reached 59.1 million tons in October, the most in three months, the Brussels-based World Steel Association estimates.
While economists surveyed by Bloomberg expect China to accelerate in the next two quarters, economies are contracting in the 17-nation euro area and Japan, which account for 16 percent of global steel output. The Congressional Budget Office says the U.S., the third-largest steelmaker, risks going into recession should policy makers fail to avert automatic spending cuts and tax rises scheduled to start next month.
Vale SA (VALE), the largest iron-ore supplier, will cut production by 1.9 percent to 306 million tons in 2013, amid signs that demand growth is slowing, the Rio de Janeiro-based company said in a statement Dec. 3. Shipments from Brazil to China generate the most demand for Capesizes, data compiled by Bloomberg show. A voyage from Australia, the biggest exporter, to China takes about 13 days, compared with 38 days from Brazil.
The glut in Capesizes extends to most of the rest of the merchant fleet. The Baltic Dirty Tanker Index, a measure of oil transportation costs, averaged the lowest on record this year, according to the Baltic Exchange. A gauge reflecting charges for six types of containers slid 12 percent since the start of January, data from the Hamburg Shipbrokers’ Association show.
Owners may diminish the glut of ore carriers by slowing down or demolishing ships. A record amount of Capesize capacity will be scrapped this year, Clarkson estimates. Speeds averaged 9.4 knots last month, compared with 10.3 two years ago, ship- tracking data compiled by Bloomberg show. That also boosts profit by cutting fuel costs, owners’ single biggest expense.
Shares of Seoul-based STX Pan Ocean fell 33 percent to 4,075 won this year and will reach 4,820.12 won in 12 months, the estimates show. Just five out of the 25 analysts covering the company recommend selling the stock. Nippon Yusen (9101) K.K., the largest Capesize owner, will report net income of $52.7 million in its fiscal year ending March 31, from a loss of $922.9 million a year earlier, according to the average of 16 analyst estimates compiled by Bloomberg.
Traders handled $8.6 billion of swaps in dry-bulk freight in the year to Nov. 1, Baltic Exchange data show. The contracts correctly predicted the direction of rates about 60 percent of the time in the past year, data compiled by Bloomberg show.
Ore inventories at Chinese ports fell 22 percent to 73.7 million tons since Sept. 1, according to Beijing Antaike Information Development Co. That signals steelmakers may need to restock. Domestic steel consumption will rise 4.1 percent to 666 million tons next year, the China Metallurgical Industry Planning and Research Institute estimates.
Expanding demand for ore comes as the flood of additional shipping capacity eases. While outstanding orders at shipyards are still equal to 18 percent of the existing fleet, that compares with 100 percent in December 2008, according to data from IHS Inc., an Englewood, Colorado-based research company. Owners made the orders as rates rose as high as $233,988.
“It really isn’t about supply anymore, it’s about how long before demand catches up,” said Erik Nikolai Stavseth, an Oslo- based analyst at Arctic Securities ASA whose recommendations on the shares of shipping companies returned 17 percent in the past year. Forward freight agreements “for Capes are too low, compared to the analyst views. Swap traders may be playing more the short-term view.”
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