Xun Yao Chen

China’s crude oil import: The most important factor An indicator that has a first-degree (direct) influence on tanker rates is China’s crude oil import volume. When import volume rises, more tankers will be in use, which pushes up shipping rates. Conversely, lower import volume means an increased number of idled ships, which leads to increased […]

Historic shipping cycles might suggest limited upsides for dry bulk shipping companies such as DryShips Inc. (DRYS), Navios Maritime Holdings Inc. (NM), Safe Bulkers Inc. (SB), and Diana Shipping Inc. (DSX) over the medium-to-long term.

Given how uncertainly demand can move, it would be a miracle if ship buyers as a whole could correctly anticipate the number of ships required to haul growth in the dry bulk trade.

While the dry bulk shipping industry has been experiencing some weakness, ship orders have remained in an uptrend since the start of the year.

With Indonesia having no intention of reversing its policy and few alternatives, year-over-year growth will likely continue to fall until the end of 2014.

As thermal power output growth has fallen, so has the growth for China’s coal imports from Indonesia and Australia—the two key countries that supply seaborne coal.

There are several things Frontline can do to pay its maturing $190 million bonds. But activities such as selling assets or raising additional capital would likely put Frontline behind its peers.

So would Frontline be able to come up with $190 million to pay off its debt that matures in 2015? As of March 31, 2014, Frontline Ltd. (FRO) had ~$111 million in cash and cash equivalents.

The restructuring gave Frontline time to ride through the industry’s weakness that also negatively affected Teekay Tanker Ltd. (TNK), Navios Maritime Acquisition Corp. (NNA), and the Guggenheim Shipping ETF (SEA).

While rates in 2014 are expected to average above 2013, and Frontline could still perform well from here, its performance could lag. It’s also a riskier investment than its peers.

The first few months of 2014 brought optimism to the crude tanker industry, allowing Frontline’s VLCCs and Suezmax vessels to earn an average of $32,700 and $27,700.

Frontline Ltd. (FRO) stock fell another 16% on the day the company announced its first quarter earnings for 2014 on May 27, 2014, even though earnings matched analysts’ consensus.

Politics can also play a major role in shaping natural gas trade and LNG (liquefied natural gas) shipments, which in turn affect Golar LNG Ltd. (GLNG) and other stocks.

Calls from Asian buyers to link LNG prices to the United States’ Henry Hub could make several liquefaction projects unprofitable.

Whether more proposals will get approval and more liquefaction capacity will come online will depend on the economic feasibility of the liquefaction plants.

The LNG (liquefied natural gas) trade has much room to grow. GasLog Ltd. (GLOG), for example, has compared LNG shipping industry to the crude tankers that hauled unrefined oil in the 1950s.

While there are a few different types of LNG vessels, the two dominant containment systems, Moss (nicknamed “dinosaur egg”) and Membrane systems are employed today.

Global energy demand will continue to increase, driven by population growth and improved standards of living. At the same time, emphasis on sustainability becomes more critical.

PotashCorp’s off-shore market saw shipments fall from 1.4 million tonnes last year to 1.3 million tonnes for the first quarter of 2014.

Price is usually the key driver of commodity companies. Over the last three years, Walter Energy’s (WLT) poor performance was largely driven by weakness in metallurgical coal prices.

If there’s one factor that we might have missed before, it’s Europe. As the United States continues to produce more crude oil, some of this oil has to go somewhere.

Since power generation industry adjusts fuel preferences based on what it pays, investors must factor in the transportation costs to deliver natural gas and coal from major suppliers to buyers.

Successful investment in coal requires understanding of the degree of substitutability and beyond.

It’s common practice for coal producers and buyers to enter fixed price and volume long-term supply contracts that last more than a year to ensure stability and predictability.

Underground mining is more expensive because it’s more capital intensive. Coal companies have to drill more, and use more expensive and complicated machines.

Coal mining in the U.S. can be segregated into three main areas: Appalachia, Interior, and West.

Coal is often called the “buried sunshine” because it developed from the remains of plants and greens that existed as long as 400 million years ago.

While North America’s share of coal production made up just 12.75% of world supply in 2012, it has one of the largest shares of the world’s proved reserves.

If the consensus estimates for the next four quarters increase, and the market’s expectation converges with the consensus, Nordic is now trading at a value territory.

Since Nordic will use the net proceeds to primarily fund vessel purchases, the company’s EBITDA will rise ~17.5% and offset the increased share count.

According to Nordic American Tanker Ltd.’s (NAT) prospectus, the company will acquire two to four vessels from net proceeds on 10,000,000 share issuance, which is now raised to 12,000,000 shares.

In 2014, urea prices in China will likely remain as a key driver of nitrogen fertilizer companies’ performance, which in turn would also affect the VanEck Vectors Agribusiness ETF.

According to Nordic American Tanker Ltd. (NAT), the company will use the net proceeds from the follow-on offering to primarily finance the acquisition of two to four vessels.

On April 8, 2014, Nordic American Tanker Ltd. (NAT) dropped ~10% from the prior day to ~$8.50 a share. The company announced on Monday April 7, 2014, that it would offer a follow-on offering.

Investors should consider that analysts use secondhand vessel prices to value dry bulk shipping companies in the stock market.

As the United States is the largest oil consumer, U.S. oil consumption patterns will continue to sway the Guggenheim Shipping ETF (SEA) and tanker companies’ outlooks.

A survey by Bloomberg pointed out that traders and factories in China held about 29 million metric tonnes of nickel stockpiled at ports.

Higher secondhand vessel values While newbuild prices for Panamax vessels were weak (or neutral depending on how you see it), vessel values for 10 year old Panamax and Capesize continued its upward trend in March. Panamax vessel value rose 2.27% in March, increasing from $22 million in Feburary to $22.5 million in March. Capesize vessels […]

Baltic Dry Index Since rising from mid-February 2014, the BDI (Baltic Dry Index) has come back down again. The BDI is a benchmark index used to assess the overall cost of moving dry bulks such as grain, iron ore, grain, nickel ore, and fertilizers across ocean in the spot market. In the spot market, ships […]

Investors can also view vessel values as a tool to get an idea of what industry insiders, such as brokers and shipping managers, are thinking.

Industry experts often show ex-China global urea capacity utilization because China’s export tax makes domestic producers’ urea more expensive for international buyers.

As most urea is produced using coal in China—anthracite in particular, nitrogen fertilizer prices are affected by movements in coal prices.

We’ve learned through previous research that week-to-week movements in the Baltic Dry Index don’t really have a strong relationship with week-to-week movements in dry bulk shipping stocks.

As a key component of potash producers’ revenue, fertilizer prices often receive wide attention from industry experts, company managers, investors, and analysts.

Since oil is used to run automobiles, auto sales growth affects crude oil demand growth. This, in turn, affects demand for oil tankers used to transport oil across the water.

The amount of fertilizers stored in North America gives investors a sense of the dynamics between supply and demand.

Outside of Brazil, the United States, and China, there are three key countries and two major crops that are important to potash: Indonesia, Malaysia, and India.

On an industry level, crude tankers might be at the start of a multi-year turnaround. But crude tankers may also be a good option for investors if they don’t believe China will see a crash.

If RIN prices rise, investors could expect higher demand for corn and prices, which is one factor that might drive fertilizer stocks.

If investors had the insight to see that mandates to blend more ethanol into gasoline would drive demand and prices for corn, fertilizer stocks would have been a good bet.

Seaborne coal supply is another factor that affects coal prices, which in turn affects global urea prices and fertilizer producers.

This series covers key trends that are currently affecting coal and natural gas prices and, consequently, nitrogen fertilizer producers as well.

After a record harvest in 2013, driven by high plantation acreage, favorable weather, and fertilizer application, crop prices have pulled back from the highs of 2012.

Crop price is one of the key drivers of fertilizer demand and prices. Globally, potash and phosphate are used for several types of crops.

Shares have climbed a bit since February 20, 2014, after Teekay Tankers beat estimates and several Wall Street analysts had upgraded most crude tanker stocks.

Companies forfeit the opportunity to benefit from lower natural gas prices when they hedge. But hedging activity protects companies’ earnings when natural gas prices rise.

Urea and UAN prices recovered towards the end of the year, as several high-cost manufactures in Eastern Europe and China curtailed production.

Lower nitrogen fertilizer prices were the key driver behind lower share prices of companies such as Terra Nitrogen Company LP (TNH) and CVR Partners LP (UAN).

The United States is one of the largest producers of agricultural products in the world, but it’s not a key producer of nitrogen fertilizers.

Nitrogen is an important nutrient for crop development and growth. It’s also the most important input that allows farmers to feed billions of people in the world.

Perhaps as a sign of confidence that dry bulk shipping companies will do well, Soros Management increased its position in the industry during the fourth quarter of 2013.

According to Diana’s earnings call, Clarksons predicts that 2014 world seaborne imports of coking coal and thermal coal will increase by 5% and 4%, respectively.

Diana Shipping Inc.’s (DSX) revenue for the fourth quarter, $39.5 million, missed analysts’ consensus of $42.6 million.

During the fourth quarter, Mosaic Co. (MOS) sold 3,381 thousand tonnes of phosphate-based fertilizer—the company’s highest quarterly sales in history.

So unless we see crop prices start to run, we shouldn’t expect a strong recovery or rally among potash stocks and the VanEck Vectors Agriculture ETF (MOO).

On January 20, 2014, Uralkali entered a contract to sell 700,000 metric tonnes of potash to China—widely viewed as the benchmark for international prices—at a price of $305 a tonne.

Investors should recall that the shipping industry is highly cyclical, as demand for fleets is driven by economic cycles and supply is inelastic for about two years—the time it takes to build vessels.

It’s not just about the iron ore, according to Navios Maritime Partners LP (NMM). Coal and grain will also be important drivers of demand for dry bulk ships.

The sharp rise in the Baltic Dry Index that many analysts saw first in late August and second in November was in part driven by restocking activity of iron ore at Chinese ports.

As store count grew over the past few years, Starbucks’ forward P/E valuation metric also expanded. What used to be just 17x gradually grew to roughly 27x, a 58% based solely on expansion in the valuations.

Perhaps one explanation for Starbucks Corp.’s (SBUX) lower store count growth is the company’s sheer size. This means the number of stores that Starbucks could open going forward could be limited.

The Baltic Dry Index (a benchmark that reflects the overall shipping rate for transporting dry bulks such as iron ore, coal, and grain across the ocean) has fallen quite a bit since the start of the year.

As a primary coffee retailer, food has been a relatively minor part of Starbucks Corp.’s (SBUX) focus in the past. But lately, Starbucks has been expanding its product offerings for food.

Noble’s large backlog for 2014 certainly shields Noble from some industry weakness. But investors should consider that backlogs are common throughout the offshore drilling industry.

While earnings beat, Noble Corp.’s (NE) management gave a dim outlook for floaters—at least for the first half of 2014.

CVR Partners employs a gasification process licensed from an affiliate of General Electric to produce nitrogen fertilizers, which uses pet coke as a primary input.

As of January 24, 2014, the market assigned a value of $1.3 billion to the company, with a trailing PE ratio of 12.48x and dividend yield of 9.86%.

Aside from improvements in global economic activity and industrial production, China could recover from a hangover in 2013.

While U.S. oil imports have been falling over the last few years, tanker companies could benefit from a brighter outlook on U.S. oil imports in 2014.

Uralkali’s move towards a volume-over-price strategy in order to gain market share (more like taking back market share) was the more important story.

As long as players coordinate with each other, suppliers can adjust production and set prices at levels that will earn them the highest economic profit.

The recent volatility we’ve seen among dry bulk shippers can scare people into thinking they should trade in and out of the stock.

Things are looking good for potash producers as of January 14 and 15, 2014, as stocks jumped on rumors of Uralkali asking for higher potash prices.

Because vessel supply is inelastic, rates can shoot up given a small change in demand. This is shown as the sharp rise in the year-over-year change in the BDI in late 2013.

Recent movements between the BDI (Baltic Dry Index) and dry bulk shippers have some investors suggesting the BDI highly correlates with stock prices.

Money supply growth has important implications for the Chinese economy. If there’s too much money lying around, it can lead to inflation and speculative activities.

Because the month-to-month data can contain short-term statistical noise that doesn’t reflect long-term fundamental changes, a six-month change or year-over-year change is often used.

As long as developers continue to snatch up land, more iron ore and coal will be needed at steel mills, which is generally positive for dry bulk shippers.

Since properties make up 42% of China’s steel consumption, as estimated by Morgan Stanley, knowing how China’s real estate market is performing is key to demand for steel.

The dry bulk shipping industry is cyclical mainly due to economic or business cycles as well as a long lead time between the placement of orders and the delivery of new vessels.

Because reporting entities sometimes like to dress their numbers up a bit to look nice, analysts also look at electricity output—where government officials say they don’t have much incentive to cook the numbers.

The combination of high fixed costs and variations in shipping rates are two factors that make industrial companies more volatile.

Dry bulk shippers, including those within the Guggenheim Shipping ETF (SEA), generally generate revenue via two contract types: spot (voyage) and time (period) charters.

Commodity prices are often said to have a strong correlation with economic activity: when economic activity picks up, higher demand will push prices up

Compared to iron ore and coal, the grain and oilseed trade makes up a much smaller part of overall dry bulk shipments—about 10%.

Coal (a fossil fuel) is another large category of dry bulk shipped by dry bulk shippers, comprising close to 30% of total dry bulk shipments.

Iron ore represents about 30% of total dry bulk shipments. It’s one of the main two ingredients (the other being coking coal) used to produce pig iron.

This series covers key suppliers of various commodities in the seaborne market as well as indicators pertaining to economic and industry fundamentals.

If there’s one thing we know for sure, it’s that a sustained underpricing of WTI to Brent would likely point to lower oil imports over the next decade.

As a result of labor layoffs and cuts in operating capacity, Potash Corp. (POT) estimates that global potash operating rate would increase to near 90%, rather than to ~85% in 2014.