Dry bulk CEOs bet on strong year despite recession fears
Thu Jan 31, 2008 7:36am EST
By Sakthi Prasad
BANGALORE, Jan 31 (Reuters) - Demand for dry bulk shipments will remain strong this year despite a recent crash in freight rates, growing fears of a U.S. recession, a weak dollar and high oil prices, chief executives of four major dry bulk carriers said at an industry forum on Wednesday.
Demand from China and other emerging economies will offset falling freight rates, the CEOs of DryShips Inc (DRYS.O: Quote, Profile, Research), Star Bulk Carriers Corp SBLK.O, TBS International (TBSI.O: Quote, Profile, Research) and Quintana Maritime Ltd (QMAR.O: Quote, Profile, Research) said at the Dry Bulk CEO Virtual Forum.
The Baltic Exchange's chief sea freight index for dry commodities .BADI, which monitors major trade routes for coal, iron ore, cement and soft commodities such as grain and sugar, lost about 47 percent, since hitting a life high of 11,039 in November last year.
George Economou of DryShips said the profitability would not be affected due to recent fall in freight rates.
"On average, a capesize vessel would be getting $90,000 a day and the expense is about $6,000 a day and there is a huge margin" he added.
Dry bulk freight rates had touched record highs last year, reaching $200,000 levels for capesize vessels, on strong demand from China and other emerging economies and also due to tight supply of vessels.
Quintana's Chief Executive Stamatis Molaris said Baltic Dry Freight Index is an indicator of spot rates only and does not reveal the future freight rate movements.
"It has nothing to do with the real and underlying fundamentals of our business in the long term and volatilities is also part of dry bulk business in the long term," he said.
Molaris also emphasized there is no change in the fundamentals and investors should not use the index to draw long-term conclusions but could use it as a short term trading instrument.
"The fundamentals are still good for 2008, 2009 and beyond and you will see new routes developing," Economou of DryShips said.
"Even if the U.S. economy slows down significantly we are not likely to see much effects in our business," Quintana's Molaris said at the conference organized by New York-based investor relations and financial communications firm Capital Link and Nasdaq International.
Besides recessionary fears, dry bulk freight rates have been hit this year by a lack of fresh cargo supply at two key global export centers and China's ongoing price negotiations for iron ore.
"The demand has been surprising us favourably in the past and we will see it again, said Chief Executive Akis Tsirigakis of Star Bulk.
OIL, DOLLAR AND SUB-PRIME
The belief that rising oil prices can eat into a shipper's margins was dispelled by Tsirigakis, who clarified that oil is not part of a shipper's cost structure.
"The oil costs are passed on to the charterers and is not part of our cost structure and hence it do not affect us," he said.
Joseph Royce of TBS International said he is continuing to see increasing exports, especially of coal and agricultural products, from the U.S., as they become cheaper due to a weaker dollar.
Royce also added that infrastructure development, which in turn propels demand for dry bulk commodities like iron ore and coal, would continue as project business is booming throughout the world.
Economou of DryShips said the sub-prime mortage-led credit crunch has not affected the companies' operations.
"The only way we are suffering from credit crunch is in the price of the stocks, which has been unnecessarily hurt.
"The fundamentals have not changed and deals are going to be there and you saw one announced yesterday," he said, refering to Excel Maritime Carriers Ltd (EXM.N: Quote, Profile, Research) $2.45 billion buyout of Quintana Maritime.
Quintana's Molaris said his company's sale to Excel Maritime is a huge confidence booster to the shipping market and that right projects will always be financed.
VESSEL SUPPLY
Dry bulk carriers have ordered more ships to meet the growing demand to ship dry bulk commodities to China, India and other emerging economies, which is expected to hit the seas in the next two to three years.
Molaris said the rise in the orderbook to build new ships was spurred by the booming demand and admitted he was sceptical about the rising supply of ships but added that shipyards are constrained with orders.
"We are currently experiencing delays in delivering ships on time from well established shipyards," he said. (Reporting by Sakthi Prasad in Bangalore; Editing by Jarshad Kakkrakandy)
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