[Click eStock] "Bulk Carriers Reflecting Inflation... Pan Ocean Target Price Up"

[Asia Economy Reporter Ji Yeon-jin] NH Investment & Securities expects the bulk carrier freight rate upcycle to continue through next year and has raised Pan Ocean's target stock price by 17%, from the previous 6,400 KRW to 7,500 KRW.

Jeong Yeon-seung, an analyst at NH Securities, stated, "Amid a rapid recovery in demand for raw materials such as iron ore, grains, and non-ferrous metals due to inflation, the bulk carrier freight rate increase caused by supply constraints is expected to peak in 2022. Although volatility in market conditions is inevitable due to the spread of COVID-19, improvement in market conditions in the second half of this year and a decrease in bulk carrier deliveries next year are expected to improve the medium- to long-term bulk carrier supply and demand balance, leading to valuation normalization."

The net supply of bulk carriers (deliveries minus scrapping) is projected to be 15.96 million dwt in 2023 and 10.41 million dwt in 2022, representing decreases of 53% and 69%, respectively, compared to this year’s 33.75 million dwt. If new orders also shrink next year, the order backlog will be depleted, making a delivery cliff in 2022 a reality. Shipowners are conservative about ordering new vessels due to the need for eco-friendly fuel use and high freight rate volatility caused by macroeconomic uncertainties, and are instead expanding purchases of secondhand ships.

At the end of last month, the bulk secondhand ship price index was 111.9 points, up 13% from the beginning of the year, indicating that this bulk carrier freight rate upcycle will continue until a large-scale bulk carrier order wave appears. Bulk carrier orders are expected to emerge around the end of next year when the profit improvement effect from rising freight rates becomes apparent. Therefore, a clear improvement in supply and demand is expected through 2022.

Historically, the stock prices of bulk carrier companies peaked at the start of cycles when new ship orders were shrinking and then surged as ship orders rapidly increased. In 2013 and 2016, the cycle began when ship orders were restrained due to oversupply concerns. Subsequently, as ship scrapping increased and cargo volume improved, supply and demand gradually improved. After some time, mentions of a severe contraction in ship supply and demand began to appear, leading to an expansion in freight rates and stock price gains.

The stock price peak coincides with the peak in ship orders, when secondhand ship prices surpass newbuilding prices and freight rates surge, prompting even conservative shipping companies to belatedly enter the ship order market, resulting in increased speculative ship orders. Over time, the rising supply burden causes stock prices to weaken, marking the end of a cycle. Analyst Jeong said, "This cycle has a smaller order backlog than in 2018. Although there is volatility in raw material cargo volumes, the supply burden is lower than at any other time." He added, "Despite macro uncertainties caused by COVID-19, from the supply side, this cycle could exceed the 2018 peak."