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Pan Asia: Transportation: Shipping - Bulkers: Why aren't share prices moving with the BDI?

Pan Asia: Transportation: Shipping

Bulkers: Why aren't share prices moving with the BDI?

New high for the BDI

The BDI has doubled since Oct 1 and reached a year high of 4,643 on Nov 18, underpinned by Capes on stronger demand for iron ore and coal from China and a rebound from OECD markets.

Equity reaction to rates looks more muted

While equities have rallied 17% thus far in 4Q, the response has been more muted than we may have seen in the past. We attempt to explain why.

Seasonal peak approaching

We currently see three key demand drivers underpinning stronger freight rates: (1) renewed iron ore demand; (2) increased coal trade; and (3) grain shipments. The latter will fade over the coming weeks, leading us to believe that the BDI will likely roll over in 1Q10 due to seasonal factors.

1Q10 could be choppy

Iron ore has been and will continue to be the delta driver for demand and therefore, rates. We think iron ore posturing tactics by both importers and exporters are a key swing factor for rates in 1Q10.

Leveraged operators to spot rates

In our view, STX Pan Ocean may be the best way to gain exposure to better-than-expected rates, given its comparatively more attractive valuations and leverage to the spot market. We reiterate our Buy rating.

Kawasaki Kisen looks most attractive to us

For investors looking beyond short-term fluctuations in rates, we think Kawasaki Kisen offers the greatest value and meaningful exposure to the bulker freight market. The stock has 96% upside potential to our target price. We reiterate

our Buy rating (on the Conviction List).

Downside risks to our Attractive view

We have assumed significant delays and cancellations due to the lack of ship finance. The key risk to our thesis is that the Chinese banks fill the funding gap left by traditional sources. While we foresee secular strength in demand, cyclical headwinds such as a double-dip in the global economy could adversely affect rates over the short to medium term.

For Detail, please go to : Pan Asia Transportation  Shipping.11.20.GS.pdf


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