SOURCE: Capital Link, Inc.

July 21, 2005 09:30 ET

Jefferies Optimistic on the Outlook of the Dry Bulk Sector

NEW YORK, NY -- (MARKET WIRE) -- July 21, 2005 -- In a recent report on the dry bulk sector, Jefferies analyst Magnus Fyhr reiterates that despite the recent weakness in charter rates the dry bulk market has a positive outlook mainly because of increased economic growth and industrial activity in China and India. Even though he lowers the 2005 EPS estimates for the drybulk stocks he follows, he still maintains the same target price stating that the companies, particularly those focusing on the spot market or with charters expiring shortly, remain highly leveraged to a recovery in charter rates.

Magnus Fyhr also reduces the 2005 charter rate estimates for the Capesize, Panamax and Handymax vessels, but indicates that the revised estimates are conservative with a potential upside. Dry bulk charter rates appear to have bottomed and are expected to increase in the second half of this year. However, rates will still remain volatile over the next several weeks, until remaining Chinese iron inventories are worked through.

Chinese demand for iron ore has showed no evidence of slowing, with a 16.6% increase in industrial production in May, Jefferies believes that inventories will continue to decline, and will require an increase in imports during the third quarter. Magnus also writes that although current charter rates are more than 50% lower than earlier this year, the current "depressed" rates still provide attractive returns on invested capital for the dry bulk shipping companies.

According to the report, the long-term fundamentals for dry bulk shipping remain favorable. The three reasons Magnus lists for this strong outlook are:

The first reason is that global economic growth which will stimulate dry bulk commodity demand. Although commodity prices are higher, global GDP is expected to increase by 4.0%-4.5% in 2005 and China's GDP is expected to increase by 8.5%-9.0%. As demand for new automobiles, housing, construction, etc. grows so will the demand for iron ore and coking coal supplies will grow. Although China is the world's leading iron ore producer, the domestic iron ore industry in China is relatively outdated, thereby favoring imports. To this effect, a lot of the new steel mills are built close to the coast.

The second reason is that large infrastructure projects in China, such as the 2008 Beijing Olympics and the 2010 World Expo in Shanghai, which will increase Chinese industrial production, resulting in increased demand from China for iron ore and coal. Other projects in China, which will require large quantities of steel for the next several years include, a national electricity grid, a national highway system, and the Yangtse-Huangpu canal.

The third reason that Magnus lists for the strong outlook in dry bulk demand is that the ton-mile demand is expected to outpace underlying trade growth. Jefferies believes that going forward the increased percentage of imports on longer trade routes should cause dry bulk ton-mile demand to expand more rapidly than underlying trade. Also, Chinese coal exports are expected to continue to decline because of domestic demand. With that said, Japanese and Korean coal imports, the main importers of Chinese coal, will have to travel further distances. Jefferies believes these supplies of coal will now come from Australia, Indonesia, South Africa and Russia.

Finally, Magnus also expects the global dry bulk fleet to grow by 5.9% this year, down from 6.7% in 2004. He believes future dry bulk orders are likely to be limited due to shipyard capacity constraints and high new building prices. Shipyards are reallocating shipbuilding capacity towards the higher margin container vessels and LNG carriers, thus making dry bulk carriers a lower priority for ship yards. He also expects that port congestion will continue to reduce the effective world dry bulk fleet by as much as 5%. Infrastructure issues in major ports in China, Australia and Brazil are likely to reduce the efficiency of the new fleet additions as well.

Among the dry bulk companies quoted on US Exchanges are DryShips (NASDAQ: DRYS) and Excel Maritime Carriers (AMEX: EXM). DryShips is among the shipping stocks covered by Jefferies.

Provided by Capital Link, Inc.

Capital Link, Inc. is an Investor Relations and Financial Communications company servicing several listed companies including companies in dry bulk shipping sector.

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