We upgrade our recommendation on Excel Maritime Carriers Ltd. (EXM) to Neutral based on its current valuation, which plummeted by nearly 52% last year. Furthermore, we believe the drybulk shipping rates will increase in the second half of 2011 attributable to a surge in demand for coal in Japan. Recently, the company has improved its time-charter contracts that will help its cash flow to be stable.
Excel Maritime has improved and consolidates the time charter contracts for its fleets.The company recently announced that it has secured under time charter employment of 78% of its operating days for the rest of 2011. The situation has markedly improved from 56% at the end of 2010. Additionally, Excel Maritime has already secured under time charter employment of 44% of its operating days for 2012. The company has secured under time charter employment of 92% and 79% of operating days for its Capesize vessels for 2011 and 2012, respectively.
Several industry researchers have predicted the rates of drybulk ships particularly for the panamax vessels will increase in the second half of 2011. This was primarily due to growing demand in Japan for raw materials to generate power to rebuild its nuclear facilities after the devastating earthquake and tsunami. Japan is the biggest importer of coal and the second largest importer of iron ore. Japan is expected to increase coal import by 5.2% in 2011 compared with the prior year. This will pull the rates for the drybulk cargos.
Nevertheless, the drybulk shipping industry is going through a very difficult situation. Despite improving global macroeconomic scenario, the financial condition of this industry is worse than what it was a year or two ago. This is solely attributable to non-economic decision taken by the shipping companies in 2008 just before the starting of worldwide recession. Due to lack of near-term foresight, most of the vessel operators had ordered large number of newbuild ships in several docks. Glut of ships resulted in severe cut-throat price competition. Excel Maritime fiercely competes with other drybulk carriers, such as Diana Shipping Inc. (DSX) and DryShips Inc. (DRYS).
