The supply-demand dynamic has turned around over the past four months. Barring DS Norden, all the stocks under our coverage have plunged. Golden Ocean (GOGL) led the pack with the highest fall of 47.2%, followed by Star Bulk Carriers (SBLK), Diana Shipping (DSX) and Pacific Basin (2343.HK), which fell by 37.9%, 32% and 32%, respectively. On the contrary, DS Norden’s (DNORD’s) stock price increased by 8.3% reflecting the company’s exposure to the product tanker market, which benefitted from the higher freight rates.
Reasons for the fall in stock prices
1. Geopolitical tensions contribute to bearish sentiments
The ongoing geopolitical crisis, heightened inflation and restrictive monetary policies have forced investors to reassess the prospects of broad-based equity markets, with dry bulk stocks being no exception. The S&P 500 Index fell by 23.6% YTD (as of 9 October, 2022) while the Drewry dry bulk equity index increased by a marginal 1.7%. Furthermore, the war has adversely impacted the dry bulk international trade, especially the export of grain from Ukraine.
2. China’s slowing economy
The fall in the BDI can also be attributed to the following factors. 1) China’s slow economic growth due to manufacturing shutdowns. Major cities were under lockdowns, which led to rationing of electricity as well as low steel output and weak iron ore demand in addition to the property crisis that is worsening. 2) Heatwaves and draught destroyed crops in the country. 3) The government’s aim to reduce steel output for lowering the country’s carbon emissions.
However, the stimulus package from the Chinese government is primarily focused on infrastructure development, which in turn should drive iron ore demand and support steel production from 4Q22, presuming the Covid situation remains under control and more lockdowns in steel-producing regions are avoided.
3. Easing port congestion increases supply
In Europe, congestion eased due to the fall in commodity demand and in China due to easing Covid-linked restrictions. Both factors led to decongestion at ports and increased tonnage availability. As a result, freight rates have started trending downwards.
Asset prices – a lagging indicator that is yet to discount the fall in BDI
Asset prices of dry bulk carriers have been falling since July due to decline in the spot TCE rates. As a result, the price of a five-year- old Capesize reduced by 4.4% in two months (from USD 57mn in July to USD 52mn in September), that of a 10-year-old Capesize by 5% (from USD 40mn in July to USD 36mn in September) and that of a 15-year-old Capesize by 5.4% (from USD 28mn in July to USD 25mn in September). Meanwhile, newbuild resale values also decreased by 4.3% to USD 63mn during the same period.
The industry is currently trading in the undervalued zone
Contrary to the current dip in stock prices, we remain optimistic about the medium-to-long-term prospects of the industry. Even though we expect tonnage availability to increase at a slower pace in the medium-to-long term, slow steaming to achieve higher rating, along with higher demolitions should more than compensate the increase in supply. The strong industry fundamentals make dry bulk companies an attractive investment in the long run. Additionally, most of the companies under our coverage are trading closer to their 52-week lows limiting the downside risk and increasing the upside potential.
EBIT margin of the companies under our coverage has been on an uptrend since 1H21 because of the rally in freight rates in 2021. While we expect the margin to soften in the upcoming quarters, it should remain well above the historical average.
Conclusion
The dry bulk shipping market is expected to remain challenging in the near term, but is likely to improve over the long term. Chinese demand will recover gradually since stimulus policies will be implemented and factories start functioning again after lockdowns in their regions are removed. We believe dry bulk companies will be attractive for long-term investment as they will start benefiting from improving supply-demand dynamics in the market.
