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Broader Markets, OSG Bankruptcy May Pressure Shipping Stocks

 November 19, 2012 10:26 AM

(By Mani) Last week, the broader markets saw further losses on US fiscal cliff fears and rising tensions in the Middle East. The S&P 500 and Dow Transportation Indices closed the week off by 1.4 percent and 2.5 percent respectively, driven by Chapter 11 bankruptcy filing of Overseas Shipholding Group (OTC: OSGIQ) and broader economic concerns.

Frontline Ltd. (NYSE: FRO) outperformed with gains of 21.9 percent as Very Large Crude Carrier (VLCC) rates continue to rise. On the other hand, dividend paying Capital Product Partners L.P (NASDAQ: CPLP) and Teekay Tankers Ltd. (NYSE: TNK) saw substantial declines of 10.4 percent and 19.9 percent, respectively.

[Related -DryShips Inc. (DRYS): Which Dry Bulk Stocks To Buy Ahead Of Market Improvement?]

DryShips, Inc. (NASDAQ: DRYS) led the sectors declines last week after reporting disappointing third quarter results and covenant breaches.

Weak spot rates and limited financing available in the market have led to a continued decline in asset values. However, the modern crude tanker sale and purchase market remains highly illiquid.

Tanker values are trending lower once again after stabilizing earlier this year. Unless spot rates improved we expect this downward bias to continue," Deutsche Bank analyst Justin Yagerman wrote in a note to clients.

[Related -DryShips Inc. (DRYS) Q3 Earnings Preview: What To Expect?]

However, VLCCs continue to rally on Chinese demand as other tankers saw declines. Once again, an active AG-East chartering program helped push spot VLCC earnings materially higher.

"The market continues to be dominated by increased Chinese chartering, but the motive behind the strengthening demand (i.e. SPR building or consumption?) remains clouded as does our near-term outlook," Yagerman wrote.

By the end of the week, spot Marex earnings improved by 182.3 percent to $19,997/day, and the forward supply of VLCCs in the AG decreased to 55 from 75 last week. The Atlantic Suezmax market declined as cargo volumes out of West Africa continue to remain weak, despite increasing Caribbean Aframax and Atlantic VLCC rates.

"While our Europe-based benchmark Aframax rates were flat w/w at $6,677/day, increased volumes in the Caribbean have pushed regional rates above $20,000/day (TD9 route)," the analyst said.

Two weeks post-Hurricane Sandy, product tanker rates have begun to decline with our benchmark TC2 (Europe to US East Coast) MR rates down 18.4 percent to $6,138/day and TC14 (US Gulf to Europe) at similar levels. LR2 rates in the Pacific market have improved on Asian demand, trending at $20,000/day.

"After several weeks of disappointing Atlantic volumes driving dry bulk rates lower, we have seen a pick-up in demand, driving last week's rally," Yagerman noted.

The iron ore majors were back in the market, particularly out of Brazil, pushing Cape rates higher by 12.8 percent to $16,411/day. As Indonesian volumes fail to provide support to the sub-Cape sectors in the Pacific, seasonally weak rates are continue to persist. However, flat rates in the Pacific and the improved Atlantic demand led to higher rates in the Panamax and Supramax sectors. By week's end, spot Panamax and Supramax rates improved by 22.3% and 3.8 percent to $7,077/day and $7,046/day respectively.

Last week, the Shanghai (Export) Containerized Freight Index (SCFI) declined by 4.9 percent as container freight rates on all four major routes finished lower. European and Mediterranean rates saw the strongest declines of 11.4 percent and 10.4 percent, despite announcements from four major carries of roughly $600/TEU GRIs for mid-December.

"We would note that while the liners are reducing capacity in an effort to push through the GRI, the timing coincides with seasonally weaker demand," Yagerman added.



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