Malaysian Bulk Carriers Bhd (Maybulk)
(April 22, RM3.04)
Maintain neutral at RM3.01 with target price of RM3.03: We took a brief look at Maybulk after a series of developments in the iron ore market but again found ourselves looking at a familiar bearish scenario of newbuilding of vessels' capacity capping the upside of the Baltic Dry Index (BDI), a still anaemic tanker market and no major surprises from its associated company PACC Offshore Services Holdings Group (POSH).
With the lack of upside and our already aggressive sum-of-parts (SOP) valuation, our target price of RM3.03 remains unchanged and we reiterate our neutral recommendation.
The world's top miners Vale and BHP Billiton made the first move last month by changing their iron ore benchmark to quarterly contracts. Last week, Rio Tinto jumped onto the bandwagon by confirming the sale of iron ore on a quarterly pricing basis, also putting an end to the decades-old annual benchmark pricing system.
Including Rio Tinto, the trio control approximately two thirds of total seaborne iron ore trade. Although details on the new system are unclear and most steel millers and miners have not reached formal contracts, we think the quarterly pricing approach has obviously brought about more volatility in demand of the commodity, and thus bulkers.
Disagreement over the sharp price increase prompted the China Iron and Steel Association (Cisa) to call for steel mills to boycott purchases from the three giant miners for three months and will likely weaken overall capesize activity. Apart from that, a Chinese trade body has banned its members from importing iron ore with less than 60% iron content, raising concerns about the knock-on effects on bulker demand. China may also investigate suspected monopoly abuse on the part of the world's three mining giants as the timing of Rio Tinto's statement on its iron ore contract appeared to have been coordinated with Vale's and BHP Billiton's at a sensitive time for iron ore talks. The three mining giants' supply, transportation, pricing and timing moves are seen to be highly coordinated, which is clearly an indication of monopoly abuse.
While we are generally doubtful that the restriction on iron ore imports could last more than a month, our main concern is still the heavy delivery of newbuildings in 2H10 as global economies remain fragile and any additional tonnage would severely put the market to the test.
Bulkers aside, the tanker market continues to be weak, with the Baltic Clean Tanker (BCT) Index consolidating at 600 to 800 points. The worldwide mismatch between tanker supply and demand is capping any upside potential. Expectations of a prolonged "L" shaped recovery for tankers also prompt us to hold our bearish view on this division.
In addition, the 21.23% owned POSH is also seeing weaker rates to at least drag down the associate's contribution till June or July 2010 before possibly picking up in 2H. - OSK Research, April 22
This article appeared in The Edge Financial Daily, April 23, 2010.
(April 22, RM3.04)
Maintain neutral at RM3.01 with target price of RM3.03: We took a brief look at Maybulk after a series of developments in the iron ore market but again found ourselves looking at a familiar bearish scenario of newbuilding of vessels' capacity capping the upside of the Baltic Dry Index (BDI), a still anaemic tanker market and no major surprises from its associated company PACC Offshore Services Holdings Group (POSH).
With the lack of upside and our already aggressive sum-of-parts (SOP) valuation, our target price of RM3.03 remains unchanged and we reiterate our neutral recommendation.
The world's top miners Vale and BHP Billiton made the first move last month by changing their iron ore benchmark to quarterly contracts. Last week, Rio Tinto jumped onto the bandwagon by confirming the sale of iron ore on a quarterly pricing basis, also putting an end to the decades-old annual benchmark pricing system.
Including Rio Tinto, the trio control approximately two thirds of total seaborne iron ore trade. Although details on the new system are unclear and most steel millers and miners have not reached formal contracts, we think the quarterly pricing approach has obviously brought about more volatility in demand of the commodity, and thus bulkers.
Disagreement over the sharp price increase prompted the China Iron and Steel Association (Cisa) to call for steel mills to boycott purchases from the three giant miners for three months and will likely weaken overall capesize activity. Apart from that, a Chinese trade body has banned its members from importing iron ore with less than 60% iron content, raising concerns about the knock-on effects on bulker demand. China may also investigate suspected monopoly abuse on the part of the world's three mining giants as the timing of Rio Tinto's statement on its iron ore contract appeared to have been coordinated with Vale's and BHP Billiton's at a sensitive time for iron ore talks. The three mining giants' supply, transportation, pricing and timing moves are seen to be highly coordinated, which is clearly an indication of monopoly abuse.
While we are generally doubtful that the restriction on iron ore imports could last more than a month, our main concern is still the heavy delivery of newbuildings in 2H10 as global economies remain fragile and any additional tonnage would severely put the market to the test.
Bulkers aside, the tanker market continues to be weak, with the Baltic Clean Tanker (BCT) Index consolidating at 600 to 800 points. The worldwide mismatch between tanker supply and demand is capping any upside potential. Expectations of a prolonged "L" shaped recovery for tankers also prompt us to hold our bearish view on this division.
In addition, the 21.23% owned POSH is also seeing weaker rates to at least drag down the associate's contribution till June or July 2010 before possibly picking up in 2H. - OSK Research, April 22
This article appeared in The Edge Financial Daily, April 23, 2010.
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