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2013 May Spawn a New Breed of “Zombie” Shipping Companies

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January 2, 2013

Earnings for ships that haul liquefied gases, cars and oil products are most likely to recover this year amid a continued glut of merchant vessels that may spur more bankruptcies, said Arctic Securities ASA.

Gas, auto and oil-product carriers are “niche” areas of the industry helped by conditions including barriers to entry, the Oslo-based investment bank said today in an e-mailed report. Arctic selected Golar LNG Ltd., which operates a fleet of gas ships, and vehicle transporter Wilh. Wilhelmsen ASA as two of its top stock picks for this year.

Fleet oversupply will again weigh on freight rates for container vessels, crude-oil tankers and ships carrying dry-bulk commodities including coal and iron ore through 2013, Arctic said. Still, the bank chose dry-bulk carrier Golden Ocean Group Ltd. as a top selection for this year along with Frontline 2012 Ltd.

“Shipping equities have generally been under pressure through 2012 as most segments are suffering from overcapacity, but we see 2013 as the year when deliveries abate in most markets,” Arctic said. Billionaire John Fredriksen is the largest investor in Golar LNG, Golden Ocean and Frontline 2012.

Charter rates for the largest crude tankers will average $23,000 a day this year, down from $25,200 in 2012, according to Arctic. Hire costs this year for the ships and smaller oil carriers as estimated by the bank are “unlikely to be enough to keep cash balances intact for the industry,” according to Arctic, which maintained a sell rating on the crude-tanker fleet.

Scrapped Vessels

Earnings for dry-bulk vessels will remain pressured even as deliveries of new ships in 2013 ease from a record and combine with scrapping of older ships to pare fleet growth to 4.1 percent from 12 percent last year, according to Arctic.

“Applying our earnings forecasts to any company model should lead to a decline in cash balances and we expect more newsflow on distress sales or companies ‘checking out,’” the bank said of dry-bulk shipping.

Arctic said it’s concerned that steps taken by banks to help prevent ship operators from running out of money may create “a sub-class of ‘zombie’ companies,” delaying a rebalancing of supply and demand. Still, now is the right time to invest in the industry, according to the report.

“Despite our view that 2012 may have been the trough year viewed across all markets, we find the likelihood of more restructurings in 2013 as very high given the fact that our earnings forecasts only offer a small uptick,” Arctic said.

Weaker Demand

Shipping of dry-bulk commodities by sea will rise 4.6 percent to 3.9 billion metric tons this year, with the market’s focus likely to shift to slowing demand from the oversupply of vessels, Arctic said.

Demand for liquefied natural gas carriers is poised to remain firm in 2013 after rates gained to records last year amid demand for the fuel from leading global importer Japan, according to the bank.

Freight rates for very large gas carriers will average $27,000 to $33,000 daily over the next three years, “a level that should keep ship owners and investors happy,” Arctic said. The vessels haul liquefied propane and butane.

– Michelle Wiese Bockmann, Copyright 2013 Bloomberg.
Image (c) Shutterstock/Albert Ziganshin

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