Bulker owners with sizeable capesize exposure, such as Genco Shipping & Trading and Star Bulk Carriers, are poised to take advantage of a strong market in the second half of the year, analysts and shipowners said.
The predictions come as capesize a spot rates are recovering since a disaster at a Brazilian iron ore mine sent earnings in the sector into a nosedive.
Capesize rates plummeted to $3,460 per day on 2 April from $13,288 since the 25 January Vale dam disaster in Brumadinho, Brazil, took 40 million tonnes of iron ore off the market.
Rates have improved steadily since then as Vale production is expected to return this year, coming in at $14,489 per day today after hitting $15,007 Friday, according to the Baltic Exchange.
Genco Shipping & Trading should get a boost from the rebounding capesize market in the second half of 2019, B Riley FBR analyst Liam Burke said in a client note.
"GNK's commercial platform consisting of medium-sized vessels provides a stable revenue stream with capesize-related revenue generating the upside leverage to earnings," he wrote, referring to Genco by its ticker symbol.
"Genco should be a beneficiary of the rebound in capesize spot rates and see upside leverage to earnings."
Genco should also benefit from improving long-term prospects for the dry bulk sector and favourable supply-demand fundamentals driven by IMO 2020-driven scrapping, he said.
"Genco's solid balance sheet provides underlying stability to more volatile earnings, in our view," he wrote.
Genco's capes are also benefiting from China's rebound in iron-ore imports, a 23% gain in year-over-year first-quarter net cash and trading at a discount to peers, Burke said.
"GNK share valuation is attractive and the balance sheet is strong," he said.
B Riley FBR reiterated its buy rating and $15 price target for the New York-listed stock, which ticked up less than 1% to $7.52 by early afternoon Tuesday.Genco's Wobensmith agrees
Chief executive John Wobensmith reaffirmed Burke's analysis, saying Genco's fleet has been set up to get steady pay from ultramaxes and supramaxes while reaping upside from the capes.
"We think it's important to have capesize exposure," he told TradeWinds.
He said capesize spot rates have risen on increased Australian and South African iron-ore trade, and stand to improve when Brazilian output returns to normal.
"We're pretty positive and agree with him," he said.
Genco will certainly benefit from the positive cape momentum but so will Star Bulk Carriers, says Deutsche Bank analyst Chris Snyder.
"SBLK is our preferred way to play the theme," he told TradeWinds, referring to the Greek shipowner by its ticker symbol.
" SBLK has more cape/newcastlemax exposure than GNK, plus SBLK’s vessels are younger."
New York-listed Star Bulk's fleet of 120 dry bulk ships, with an 8.3-year average age, includes 35 kamsarmaxes, 17 ultramaxes, 16 newcastlemaxes, 11 supramaxes, seven post-panamaxes and two panamaxes.
Deutsche Bank gives buy ratings and $15 price targets to both Genco and Star Bulk, while Fearnleys puts Genco at buy and $13.
Jefferies also has a buy rating and $14 price target on New York-headquartered Genco, given fourth-quarter capesize spot rates may hit $18,000 per day based on a positive forward freight agreement market.
"Capesize spot rates will certainly strengthen in the second half of 2019 relative to the first half."
Many factors show an upswing, including robust Chinese steel output and iron-ore demand and higher coal demand in Vietnam, Thailand, Pakistan and China, he said.
Beyond that, cape demand should remain tight amid 3% expected fleet growth and dry dockings for scrubber retrofits, he said.
"As for the biggest winners from increasing capesize spot rates, GNK is certainly up there, but SBLK will also be a major beneficiary," he said.
"In conclusion, if and when capesize spot rates increase, GNK and SBLK will certainly be the biggest winners in our dry bulk coverage universe due to their large number of spot-exposed capesizes."