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DRY BULK UPDATE Ore’s H2 after coal-fuelled H1 Ahead of the Q2 results for the majority of our covered dry bulk stocks (Safe Bulkers reported on 25 July), we continue to believe that the investment case is playing out in accordance with our sector outlook from September 2017, albeit surprising a bit on the upside. Chinese data points YTD signal a solid outlook for H2, which historically has outperformed H1, as iron ore trade is set to take over for coal as the main driver for freight rate improvements, we believe. We reiterate our BUY recommendations across the sector, and continue to highlight Golden Ocean (TP NOK88) as our top pick.
YTD Capesize freight rates are up 42% YOY, but the shares are holding back. Our extended dry bulk peer group peaked in early April 2017 and has since struggled to break through that ceiling. However, Capesize freight rates YTD have averaged 42% above the same period in 2017 and the fundamental drivers for dry bulk demand continue to be lined up for a seasonally stronger H2 in our view.
While Chinese electricity production growth remains strong… As of June, YTD Chinese electricity production has continued to grow at an impressive 7.9% pace YOY and the Chinese government is addressing supply issues due to the strong demand.
…hydropower has disappointed and other renewables come from a low base… YTD hydro-generated electricity production growth has been a measly 0.1%, and its share in the total energy mix has declined from 17% last year to 14% YTD. Although other renewable sources have posted 24.2% YTD growth (albeit from a small base), the renewables are struggling to keep up with the rapid rise in electricity demand.
…which leaves the energy source of last resort – coal. Thermal electricity generation (mainly coal) has been making up the slack in production and increased its share in the energy mix from 73% of 2017 production to 75% YTD. At the same time, China has reduced its coal production by 1.8% YTD (which accounts for more than 90% of domestic consumption), boosting YTD imports by 9.2% and lifting YTD freight rates.
Iron ore trade set to take off in seasonally stronger H2. June steel production was up by 11.5% YOY (7.5% YTD), while Chinese rebar stocks have nearly halved since March and domestic production of iron ore was down by 39% YTD as of June. We believe iron ore imports are set to increase in H2 2018 to meet major producers’ full-year guidance, particularly from Brazil as the flight to quality still is the name of the game.
Golden Ocean (BUY, TP NOK88(85)) is our top pick for the sector, while we continue to have BUY recommendations for D/S Norden (TP DKK141(135)), Eagle Bulk (TP USD7.10), Genco (TP USD19.4(20.6)) and Safe Bulkers (TP USD3.90(4.10)).