Shipowners facing the possibility of 50% fuel price increase

Because of the international nature of the shipping industry, it had long been organized that action to improve safety in maritime operations would be more effective if carried out at an international level rather than by individual countries acting unilaterally and without coordinating with others. Based on this principle, The International Maritime Organization (IMO) as a United Nations body - has approved rules to reduce harmful emissions from ships, by banning vessels from using their traditional heavy fuel in many parts of the world. This could prompt a rise of as much as 50% in fuel cost for shipowners.


The oil currently used by ships is known as bunker, which is the residue left after higher-quality products are refined out of crude oil and is far cheaper than other fuels.

The Marine Environment Protection Committee (MEPC) of the International Maritime Organization (IMO) - according to Finfacts Business said last week that the main changes would see a progressive reduction in sulphur oxide (SOx) emissions from ships, with the global sulphur cap reduced initially to 3.50% from the current 4.50%, effective from 1 January 2012; then progressively to 0.50 %, effective from 1 January 2020, subject to a feasibility review to be completed no later than 2018.

The rules are expected to be adopted formally by the IMO committee at its next meeting in October and come into force 16 months after that. The rules will be obligatory for ships flying the flags of IMO member countries – the vast majority of international shipping.

According to estimates, about 45% of the orders booked in the shipyards currently are for dry bulk carriers. The Baltic Dry Index, the benchmark for freight rates for bulk carriers, hit an all-time high of 11,039 on November 13, 2007, up from 2,438 on January 3rd in 2006

Capital Link 2nd Annual Shipping Conference, Part Two: The Dry Bulkers: DRYS and Demand for Dry Bulk

George Economu, the DryShips, Inc. CEO, made some compelling arguments in support of his premise that DryShips, Inc. (Nasdaq: DRYS) is the best buy in the Dry Bulk:

• Strong balance sheet with $680 million liquidity.
• 63% of 2008 vessel days unfixed.
• 17% more operating days then in 2007.
• DRYS market cap is 84% greater than average of the other dry bulkers with market caps in excess of $1 billion.
• Yet DRYS had 333% more earnings in 2007 than the average of the others.
• DRYS should earn $651 million in 2008, 325% more than the average of the others.
• Even in 2009, DRYS should earn $459 million, 168% more than the others.
• The combined market cap of all the others is 172% greater than that of DRYS, yet the combined net income of all the others is only 17% greater than DRYS. “Why pay 172% more for only 17% more earnings?”


But the main topics that most wanted to know dealt with his strategies going forward. Here are some questions and answers you may find of interest.

Q. Is the 6 million new shelf registration going to market or was it just replenishing the shelf?

A. ·· Just replenishing the shelf. The 6 million shares that were sold were at an average price of about $83/share, above the net asset value of the company (about $75/share). No plans to go to market with these shares in the first half, and most certainly not when the stock price is below NAV.

Q. Are the proceeds raised in the recent stock sale of going to be used for the drill ships? [DRYS has options expiring in a few days (March 24, 2008) for 2 drill ships at a cost of $800 million per vessel. There are 2 more that he personally has options on].

A. ·· Some of the money may be, but not most. [He would not say what the rest of the money will be used for, but said would not be used to pay down debt because debt levels already low. Also said there are no other asset classes that are of interest to him right now. Also said (in panel discussion on Merger and Acquisition) that there are no attractive targets right now and best way to grow is to acquire ships rather than other companies. Makes no sense to do a merger when the stock values are trading below NAV. My guess is he will use it to either acquire ships or acquire other shippers’ stock at below NAV, in addition to buying drillships.]

Q. Is the recent interest in Ocean Rig (OCR) and drill ships a sign that dry bulk is no longer of interest, or the best use of investment dollars?

A. ·· No, it is simply a decision to put some of the significant cash generated by DRYS to work in attractive opportunities. The drill ships, if acquired, would generate a cash on cash return of 17.5%. Because they would be leveraged the actual return on equity would be greater. “Can you do better?”

Q. Will you use OCR to manage the drill ships if they are acquired by DRYS?

A. ·· That is a possibility.

Q. Will DRYS keep its vessels in the spot market or go out longer?

A. ·· Would not say. But he seemed to imply that he would “maybe” go out longer. There are several things that lead me to believe that he may be going long on his charters, or may intend to do so.

“Better to stay spot, but there are times when time charters might be better. Currently we are in an environment when you should at least think of it.”

After this comment another dry bulk CEO stated “If George is going long, I am going longer.”

The fleet deployment lists in the handouts, while almost identical to those used in the Q4 conf. call, had the last two columns showing the charter amount and length of charters deleted.

He did not say he was going to stay spot. Stated would do what is necessary to insure shareholder value in the next 3 – 5 years.

Q. Is the newbuild Cape on target for delivery about July 1, 2008?

A. ·· Yes.

General comments on demand for dry bulk shipping

Here are some assorted comments from various dry bulk CEO’s:

• Should be strong March and April because of resolution of iron ore negotiations. Should be strong fall.

• Non Japanese ships over 10 years old cannot trade Japan.

• US coal exports increased from 40 to 60 million tons, should continue to increase. Weak dollar not all bad.

• India has the same population as China but the same economy as the Netherlands. It is an untold story in future demand. As India develops, it will reduce its iron ore exports and consume them instead, forcing China to replace with ore from further away, requiring greater ton mile demand.

• China continues to urbanize and industrialize. It currently builds the equivalent of 3 Manhattans a year. This requires roads, rails and buildings. Ton miles should increase at a rate of 8-10% per year.

• The Chinese have an advantage to underestimate demand. Demand will be higher than predictions.

• Shipping fundamentals are very strong. There is a disconnect between the stock market and shipping.

• 50% of dry bulk is related to steel.

• Only 12% of the Chinese economy is involved in export. Of the Chinese exports, only 20% of that 12% is to the U.S. The key drivers are energy, mining and infrastructure.

• There are huge trading desks that follow the Baltic Dry Index and trade the shippers accordingly. These desks have been successful shorting the stocks because general market fear has kept buyers away. But long term fundamentals are strong, and are causing charterers to come in and enter into charters for 3- 5 years out.

Note: I was going to do the tankers but decided to get my notes on the dry bulkers done first. Next I will review Excel, Navios, and Starbulk, not necessarily in that order.

$200 oil is a very real possibility

decade or so ago sustainable energy was thought more in terms of availability relative to the rate of use. In today’s global economy however, with the constant growing shortage of energy and in light of great demand from the emerging markets, there is clearly growing concern as to how the energy needs are being addressed and what’s being done in prolonging energy sustainability prospects. Including the overconsumption factor which consequently elevates the risk of resource depletion.

Currently, the subject of resource sustainability ranks the highest on the world agenda and remains directed at a very critical question. How the developing countries, including the emerging markets of India and China which alone constitute 40% of humanity and fast advancing economically, will meet their rapidly intensifying energy needs?

The world presently consumes energy at a steady 15 trillion watts, 86.5% of which comes from burning fosil fuels. By 2050, experts expect demand to increase by another 30 trillion watts. For those aware of the real state of our global energy situation - the next logical question would be : where is this oil going to come from?!

The sad reality is that despite all the spin and hype about oil, limited supplies of oil simply can not keep up with soaring global demand. During fiscal ‘05, despite the unquestionable fundamentals of oil market at the time, almost every single Wall Street firm projected that oil will cost no more than $25-$45 a barrel in three year’s time.

According to reports, world’s oil production may have peaked since 2005. If we accept the reality of peak oil production, what are the implications? Unquestionably, price instability. An instability that we continue to experience as of 2008 in both oil and gas markets. (Peak oil does not mean an abrupt end to oil. It does mean that demand of conventional oil will exceed supplies of conventional crude, thus marking the end to cheap crude).

The idea that oil reserves will be there forever is a non-realistic notion. It is concept that we should disengage rapidly from and instead accept the reality, that world’s wells are at full capacity and at some point will run dry.

A good indication of this theory is that of Saudi engineers injecting close to 7million barrels of seawater daily, into the Gawhar field in Saudi Arabia, which produces over half of Saudi oilfield. This is a fatal sign that the world’s largest oil field is nearing a collapse of output. Keep in mind, Saudi Arabia is responsible for approximately one eighth of the world’s oil. As Saudi Arabia goes, so goes the world.

What’s more, besides the fact that no significant world-scale oil discoveries have been made since the North Sea and Alaska in the 1970s - for the first time ever, Saudi officials admitted to the world’s leading industrial powers - that OPEC will not be able to meet Western oil demand in 10 - 15 years.

Additionally, on average, production in the world’s oil and gas fields is declining between four and six percent and more significantly, almost all the spare capacity has disappeared.

As energy supplies decline the complexity of human enterprise unavoidably will get effected - and whether we like admitting it or not : $200 oil barrel, by the end of this decade - is very much a possibility if not a certainty.

The U.S. Economy expanding. Not receding

Friday’s job report (May 2nd) was another indication that the US economy is not about to roll over, as widely predicted. The report came in stronger than the consensus expected with non-farm payrolls declining only 20K in April from an expected loss of 75K, while revisions to February and March subtracted 8K. This is consistent with sluggish growth for the first half of fiscal ‘08, but not recession. If this were a true recession, the kind that feeds upon itself, job losses would be much more severe and corporate profits would not be nearly as good. As a result, the Unemployment Rate dropped to almost 4.9 percent from 5.1 percent, with Manufacturing Payrolls also reflecting an improvement as it rose to -46K from -48K.


Despite a loss of payroll jobs in the past three months, it is likely that real GDP grew at about 2% annual rate in the first quarter. GDP growth for the fourth quarter of 2007 was also up slightly, while the prior two quarters averaged over 4 percent growth. Worth pointing out is that while real GDP slowed to just 0.6% in the first quarter, the number is expected to be revised up, and an economic rebound to more than 3% growth - in the second half of fiscal ‘08 is highly probable.

Furthermore, consumer spending has been up steadily through the first quarter. Exports are booming with the Factory Orders index adding to the improved outlook and surging to 1.4% from a negative 0.9%. Business investment in equipment and software continue holding up very well. And at 154 million employed, the civilian labor force just hit a new all-time high.

Not bad I’d say for a US economy which constantly finds itself in the midst of a fear mongering campaign from the vast armies of journalists and economists who never fail to sensationalize economic problems. Yet, the economy manages to expand and show off signs of resilience.

Only few weeks ago we were headed for our first-blown horrible recession in 16 years, according to predictions made by the economist elite at Merrill Lynch and Morgan Stanley. This notion was also reinforced only a couple of days ago by Warren Buffett in a CNBC interview.

This is unfortunate. Media hysteria over the mortgage crisis and continued collapse in homebuilding has certainly misled countless people about prospects for the real economy. We still grew at 0.6%. This naturally leads one to ask the contrarian question: Since when have the media and the Buffetts of the world ever had our best interest at heart and given us an advance warning of an impending economic crisis that actually came to pass? Exactly.

Napoleon Bonaparte cynically once said “Men are moved by two levers only: fear and self interest.” You would agree with me that Wall Street has become master of both elements. Fear sells. It sells newsletters, it sells bookings and most importantly shakes the weak hands.

Is it ethical? Definitely not. Will the tactic ever change? Probably never. But what can change is our rejection of media-propagated myths and clichés along with Wall Street’s misleading and unfounded analytical arguments thrown our way. It simply shouldn’t be tolerated.

Bottom line: First quarter real GDP was up. Bonds are yielding much more than short-term bills with the stock market well along its route to recovery. Increases in consumer spending and exports will keep GDP growth positive in the second quarter. The fiscal stimulus will see to that. Just yesterday, the April ISM Services Index, a national nonmanufacturing survey, rose to 52.0, from 49.6 - reflecting expansion. This was higher than the expected reading of 49.1.

There will not be a single down quarter for GDP in ‘08. This is not a recession.

Entrevista a David O'Reilly presidente de Chevron

En 2001, O'Reilly, de 61 años y oriundo de Irlanda, elevó a Chevron al estatus de "gigante petrolero" al absorber a Texaco Inc., entonces la tercera petrolera de EE.UU. En 2005, se quedó con Unocal Corp. después de sacar de la carrera a sus pares chinos, que también querían adquirir a la empresa californiana.


WSJ: En un discurso de 2005, dijo: "Los tiempos en que podíamos contar con crudo barato y gas natural aún más barato, claramente se están acabando". Ese día, el barril de petróleo costaba US$47. Ayer, cerró en más de US$113. ¿Alguna otra predicción?

O'Reilly: No creo que el mercado suba significativamente más de su nivel actual. Se está viendo el impacto de los altos precios en la demanda. […] El mercado nos está diciendo que se necesita un cambio de comportamiento y creo que empezamos a verlo, pero debe ser mayor.

WSJ: ¿En qué rango de precio cree que se mantendrá el crudo?

O'Reilly: No lo puedo predecir. Me tendría que decir cuál será la situación económica del mundo dentro de un año. No creo que vaya a regresar a los bajos niveles de fines de los años 90 y principios de 2000.

WSJ: ¿Nunca?

O'Reilly: No.

WSJ: El uso de gasolina ha bajado en EE.UU. (el mayor consumidor del mundo). ¿Ve que esté pasando lo mismo en otros países?

O'Reilly: No. Estuve en Turquía hace un par de meses. La gasolina cuesta casi US$11 por galón, las ventas de autos marcan récords... Si uno cambia su bicicleta por una moto o un auto, está dispuesto a pagar ese precio porque el impacto en su estilo de vida es enorme. Eso no quiere decir que estos autos devoren gasolina, son eficientes, pero hasta los carros eficientes necesitan gasolina.

WSJ: ¿Es moralmente justificable continuar usando tanta producción agrícola como combustible?

O'Reilly: No voy a hacer juicios morales sobre eso. Estamos rumbo a duplicar o más que duplicar la producción y el consumo de etanol en nuestros automóviles, algo que se nos exige por ley (en EE.UU.). Creo que el tema debería ser analizado por personas que saben más sobre la situación del suministro de alimentos. Sé mucho de petróleo y gas, pero no soy un experto en comida.

WSJ: ¿Cuál es el rol de Chevron en el desarrollo de combustibles alternativos?

O'Reilly: Ya que estamos tan involucrados en el negocio de combustible de transporte, creo que nuestro papel es intentar encontrar una fuente de biocombustibles que no se derive de los alimentos y que pueda aportar algo significativo a una escala comercial. Si no es a escala, no va a hacer una diferencia importante.

WSJ: ¿Qué tan cerca están (de
lograrlo)?

O'Reilly: A años todavía.

WSJ: Mucha gente dice que lo correcto es reducir el número de plantas alimentadas por carbón, debido a sus efectos ambientales, y que deberíamos usar combustibles fósiles como el gas natural que tienen menos contaminantes.

O'Reilly: No se puede todo a la vez. Si no quieren carbón y lo que quieren es gas, entonces más les vale que comiencen a explorar desde ya.

WSJ: ¿Es función de una petrolera enfrentar a la gente con la realidad?

O'Reilly: Sí. De hecho, una de mis misiones en la vida hoy en día es educar a la gente sobre el tema energético. Somos un país analfabeta en el tema.

WSJ: ¿Qué lecciones ha aprendido en sus ocho años al frente de Chevron?

O'Reilly: Es un negocio a largo plazo y uno hace inversiones a largo plazo. Debe ser resistente y firme, y estar comprometido con sus planes. No hay que sentirse muy abatido cuando se viven tiempos difíciles, pero tampoco hay que ser exuberante cuando se pasa por buenas épocas porque ninguna de esas son representativas del largo plazo.

La inflación alimentaria crea una bonanza para firmas como Nestlé, ADM y Danone

Mientras el alza en los precios de los alimentos irrita a los países pobres, un amplio espectro de compañías de alimentos se da un banquete. Las ganancias de las empresas que procesan granos, venden fertilizantes, fabrican maquinaria agrícola y proveen semillas a los agricultores se han disparado. Algunos fabricantes de alimentos procesados tampoco se pueden quejar. Estas firmas cosechan los beneficios de un aumento en la demanda global de alimentos y granos en momentos en los que los suministros apenas satisfacen la demanda.


La señal más reciente de esta bonanza para las empresas de alimentos provino de Archer-Daniels-Midland Co. (ADM). El procesador estadounidense de granos divulgó el martes un salto de 42% en sus ganancias del tercer trimestre fiscal, incluyendo la septuplicación de las utilidades de la filial que almacena, transporta y comercia granos como trigo, maíz y soya. "La volatilidad en los mercados de materias primas presenta oportunidades sin precedentes", dijo Patricia Woertz, presidenta ejecutiva de la compañía.

Los súbitos aumentos en los costos de los alimentos han ocasionado disturbios en África, el acaparamiento de arroz en algunas partes de Asia y ha motivado a algunos países a limitar sus exportaciones.

La crisis, que algunos califican como la más grave de las últimas tres décadas, es causada por un aumento de la demanda de países de rápido crecimiento como China e India, una caída en los inventarios de granos producida por las inclemencias del clima y la mayor cantidad de tierras usadas para cultivar plantas para hacer combustibles en vez de comida.

Ban Ki-moon, secretario general de Naciones Unidas, solicitó el martes la creación de un panel de alto nivel para enfrentar el impacto de los altos precios de los granos y el petróleo. Aseguró que los países deben hacer más para evitar "el descontento social en una escala sin precedentes".

En particular, aseveró, los países deberían aportar fondos para compensar el déficit de US$755 millones del Programa Mundial de Alimentos, cuya misión es alimentar a los hambrientos del mundo.

Las compañías que trabajan más estrechamente con los agricultores derivan los mayores beneficios de los altos precios de los alimentos, mientras que las que se encuentran más abajo en la cadena alimenticia, como el productor de carne Tyson Foods Inc., no pueden tras pasar todos los incrementos a los consumidores.

Los agricultores, que desde hace años no tenían los bolsillos tan llenos, están pagando más dinero por semillas, fertilizantes y maquinaria para cumplir con la mayor demanda.

Monsanto Co., que produce semillas y herbicidas, aseguró que sus ganancias en el último trimestre se duplicaron con creces. Sus rivales DuPont Co. y Syngenta AG acaban de revisar al alza sus predicciones de ganancias.

El fabricante de maquinaria agrícola Deere & Co. registró un aumento de 55% en sus ingresos del último trimestre. Las ganancias netas del productor de fertilizantes Mosaic Co. en el tercer trimestre se multiplicaron por 12.

Woertz, la máxima ejecutiva de Archer-Daniels-Midland, dijo que comprende el descontento de los consumidores que están pagando más por sus alimentos, pero atribuyó la culpa al alza en los precios del combustible, no a los granos y los biocombustibles. "Alejarse de los biocombustibles es una insensatez", manifestó.

El incremento en los costos de los ingredientes ha afectado a varias compañías estadounidenses de alimentos procesados, como Kraft Foods Inc. En Europa, sin embargo, la inflación de los alimentos ha propulsado los resultados de dos de los mayores productores de alimentos del mundo, la suiza Nestlé SA y la francesa Groupe Danone SA. Ambas han traspasado las alzas de precios a los consumidores sin resentir sus ganancias.

Al igual que muchas compañías europeas, Nestlé no reveló sus ganancias del primer trimestre. No obstante, las ventas crecieron 6%, frente al primer trimestre del año anterior, para ascender a los 25.700 millones de francos suizos (US$24.800 millones). Al eliminar los efectos cambiarios, de adquisiciones y retiros de capital, las ventas subieron 9,8%, un gran salto para una empresa de tal envergadura. "Este desempeño es sin precedentes", dijo el director de relaciones con los inversionistas de Nestlé, Roddy Child-Villiers, en una conferencia con analistas el 21 de abril. Nestlé planea elevar sus márgenes de ganancia este año, una señal de que ha logrado traspasar sus mayores costos a los consumidores sin afectar sus ganancias.

El aumento de sus precios ha reducido las ventas de la leche, los yogures y otros productos lácteos de Danone, pero eso no ha afectado el crecimiento de los ingresos. La empresa parisina dice que produce un quinto de los productos lácteos frescos del mundo. Los mayores costos de los concentrados para animales han encarecido la cría de vacas, disparando los precios de la leche al por mayor.