Weaker China Ore Usage Seen Curbing Interest in Bulk-Ship Stocks

Charter costs for ships that carry iron ore are unlikely to rebound to levels that might stoke investor interest in companies’ shares as Chinese demand for the steelmaking raw material slows, said Dahlman Rose & Co.

Cargoes of the ore carried to China by sea will rise 3 percent in 2013, a level that fails to match continued growth in fleet capacity, the New York-based investment bank said in a report. The shipping industry has become more reliant on the Asian nation because of Europe’s economic slowdown and increasing U.S. self-sufficiency in energy, it said.

Iron ore is the main cargo for Capesizes, the largest carriers of the commodity. Hire rates for the vessels gained for a fourth session today, helping to lift the Baltic Dry Index. The dry-bulk fleet’s capacity surged by about 80 percent since 2007 and a lack of “non-distressed balance sheets” among companies deterred investors, the bank said.

“With only modest demand growth expected in China, we struggle to conclude that rates can reach a level to achieve timely debt repayment and a return of compelling dividends,” Dahlman Rose said. Investors looking for bets on China have better choices than shipping, according to the report.

Daily average returns for Capesizes increased 11 percent to $7,024, figures from the London-based Baltic Exchange showed. The ships are the largest tracked by the index, a broader gauge of costs to transport minerals and grains by sea, which added 2.1 percent to 781, the 10th climb in a row.

More Ships

Still, the Bloomberg Dry Ships Index, tracking the shares of 12 companies including Diana Shipping Inc., has plunged 84 percent from its record high in October 2007. The dry-bulk fleet’s capacity is set to increase another 14 percent this year, based on new vessels on order that are scheduled for delivery, according to Dahlman Rose.

“The ocean-going marine transport sector remains out of favor among investors, as high-profile bankruptcies, robust global fleet growth and a change to iron-ore price mechanisms have rendered the industry virtually unrecognizable to investors that participated during its golden age in the middle of the last decade,” the bank said.

China will be the destination for about 43 percent of the 2.24 billion metric tons of iron ore and coal to be shipped by sea in 2013, according to Clarkson Plc, the world’s biggest shipbroker. The country’s demand for seaborne iron-ore imports will rise 8 percent this year to 779 million tons, matching 2012 growth, its estimates show.

Among the three classes of smaller vessels tracked by the index, daily returns for Panamaxes, the largest ships to navigate the Panama Canal, declined 1.9 percent to $5,974. Supramaxes that carry about 25 percent less cargo fell 0.3 percent to $7,719 and Handysizes, the smallest vessels in the gauge, gained 0.7 percent to $6,815.

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