Shipping – dry bulk - Too Fast and Too Much

· Baltic Dry Index skyrocketed. Though we were amongst the earliest who turned positive on the dry bulk sector, we were still surprised on the recent staggering rise of the BDI to the height of 4,291 following a continuously winning run of 34 days. BDI has since taken a breather to close at 3,809 during the time of writing.

· BDI lifted by China’s record high iron ore imports. Cheaper spot iron ore price, lending spree by China’s banks, increased traders’ speculation and higher domestic production cost are amongst the main factors driving the BDI party. China’s iron ore imports for the first 4 months of 2009 already amounted to 189m tonnes, a big 23% yoy jump compared to similiar periods in 2008 (4M2008: 153.5m tonnes).

· but global steel industry still in a mend. World Steel Association forecasts 2009 world steel consumption to fall 14.9% yoy to 1,018.6m tonnes (2008: 1,197.4m tonnes) even factoring the mammoth global government’s stimulus packages. US and Europe (including CIS regions) will lead the pack with forecasted steel use decline of 36.6% and 25.0% respectively. China meanwhile is expected to record a smaller consumption dip of 5%.

· which implies that China risks running an iron ore surplus. China Metallurgical Mining Enterprise Association projected 2009 China’s iron ore import at only 350m tonnes (2008: 444m tonnes) as steel demand wanes. The China Iron & Steel Association shared the same sentiment and believed that China is exacerbating the risk of iron ore surplus in 2009 with current ore inventory at 70.8m tonnes, back to the high levels in Oct 08.

· Fleet supply to outstrip demand. The consensus is that dry bulk fleet growth will accelerate in the next 2-3 years when demand growth is likely to lag despite very high scrapping. While newbuilds deliveries were slower than expected in 1H09, this should pick up in 2H09 and exert downward pressure on the BDI. China and Korea’s shipyards rescue program which encourage vessels’ ownership at cheap financing could prolong the dry bulk downturn as it aggravates the excess capacity problem.

· Ripe for a correction. The BDI futures had corrected substantially in the past week with current BDI futures implying levels between 2,030 to 2,335 for the 2H09. Maintaining our 2009 average BDI forecast of 2000. While we retain our earnings forecast and HOLD recommendation for Maybulk, we are raising our target price to RM3.00 as we value its dry bulk operation at 1.4x book value (previously 1.0x) which is in line with regional bulkers. Investors who benefited from the recent BDI rally should take profit as current high levels are not sustainable.