Dry bulk stocks tipped as short-term buy

Kuala Lumpur: Stock analysts at Malaysian bank CIMB have identified the dry bulk sector as a short-term trading opportunity, with rates predicted to rally by up to 50% within coming weeks.

"Despite our negative view of the sector over the medium term, dry bulk freight rates have fallen so fast and by so much that a short-term recovery is almost certain to materialise," says the latest CIMB report. "Investors with larger risk appetites may be able to profit from the current excess pessimism. The key risk of this strategy is timing the point of entry and exit."

The recent "crash" in the Baltic Dry Index has been driven substantially by temporary factors, CIMB expalins. "Despite our negative view on dry bulk freight rates due to conversion and newbuilding deliveries, and the progressively weaker Chinese and global economies, the BDI has capitulated much faster than we had expected, from over 8,000 to only 4,800 points. While a deterioration of the macro fundamentals is an important contributor, several temporary factors bear an outsized responsibility for the sharp decline over the past two weeks."

When these factors reverse, the BDI will recover its near-term losses "very quickly", CIMB predicts. "We suspect that the BDI will reach a near-term trough over the next two to four weeks and rebound to the 6,500-7,000 level in Oct-Nov."

The bank cites four "transient factors" depressing the market:
- First and most important is the miners' current efforts to reduce port congestion by stopping the nomination of vessels. However, this cannot go on beyond a certain number of weeks as iron ore stockpiles will accumulate at the loading ports.
- Second, Vale is holding back on exports while trying to renegotiate iron ore prices, which CIMB think that Asian buyers will have no choice but to accept.
- Third, mishaps like the rail car accident at Rio Tinto's Cape Lambert port and the mining deaths at BHP Billiton's Yandi field should not disrupt the supply chain for too long.
- Last, the Chinese Olympic shutdowns will come to an end on 20 September.

CIMB therefore upgrades its assessment of the sector from Underweight to Trading Buy for a short-term trade. Share prices have been severely battered and are attractive at current levels, it says. The bank's top trading pick is Pacific Basin. [13/09/08]

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