Greek Shipping Company Helps Satisfy Chinese Appetite For Coal

BY BRAD KELLY
INVESTOR'S BUSINESS DAILY
Posted 8/29/2007

China dethroned the U.S. last year as the world's largest emitter of carbon dioxide, a Dutch policy group reports.

Some blame the greenhouse gas for what they call global warming.

This is due in large part to China's heavy reliance on coal-fired power plants. The nation opens about one plant a week, according to China's State Environmental Protection Administration.
Coal makes up almost 70% of primary energy use in China vs. a world average of less than 30%, the agency says. The country consumes more coal than Europe, Japan and the U.S. combined.
China, once one of world's biggest coal exporters, is now a net importer.

Excel Maritime Carriers (EXM) will be one of the many dry-bulk shippers transporting coal to quench the energy thirst of the world's most populist nation.

The key driver behind dry-bulk shipping growth over the past 10 years has been rapidly growing global iron ore and coal trades, says analyst Douglas Mavrinac of Jefferies & Co.
Coal Growth

In 2006, coal and iron ore, a key component of steel, accounted for 48% of the total dry-bulk trade of 2.83 billion metric tons, according to Clarksons Research Services. The firm tracks figures of the seaborne trade industry.

Also, India and the Philippines have put export taxes on their coal reserves in order to save enough for their own energy demands.

This forces China to import coal from places farther away, such as South and North America.
It is more expensive for the customer, but more lucrative for dry-bulk carriers like Excel.
"Given Chinese electricity consumption outpacing domestic coal production gains," Mavrinac said, "East Asian coal-consuming nations will increasingly rely on coal from more distant suppliers, resulting in ton-mile demand expansion."

Excel's fleet of 16 dry-bulk vessels, 10 panamax and six handymax, benefits from longer shipping routes. The Greek shipper is also operating in a market hitting record-high day rates for use of its vessels.

The two most common forms of shipping in the dry freight trade are time charters and spot charters.

Under time charters, the customer rents a vessel at a fixed daily rate for months or years and pays all voyage-related costs. Spot rates charge for a one-way delivery to a certain destination.
Ship owners play the spot market when they expect rates to remain stable or improve. And analysts say rates are hitting all-time highs.

Excel prefers stability, Mavrinac says. Its strategy has been to sign long-term contracts. Some of its charters have expired and are up for renewal.

Timing, as they say, is everything. Whether Excel signs a ship to a long-term contract or a spot charter, it will take advantage of today's higher day rates.

Mavrinac says a panamax, the second-largest dry-bulk ship, can fetch up to $58,000 a day for its services. The smallest dry-bulk vessel, the handymax, charges $46,000 to $48,000 a day, he says.

Excel typically signs 75% of its fleet to long-term charters. The other 25% take advantage of the spot market.

"We increased our charter coverage to 53% of our fleet operating days for the second half of 2007 and 40% for the full year 2008," Chief Executive Christopher Georgakis said in the second-quarter press release.

"(We're) locking in strong rates and predictable cash flows for the longer term," he said, "while with the rest of our fleet will continue to take advantage of spot market opportunities as they arise."

Excel says second-quarter earnings tripled to 69 cents a share ex items. Analysts polled by Thomson Financial expected 57 cents.

Revenue rose 40% to $37.3 million. Excel says its vessels earned an average time charter rate of $25,142 a day, up 43% from last year. That average reflects rates that Excel signed onto two years ago.

"It was a stellar quarter, despite the company having to dry dock four or five vessels," said analyst Grant Hopkins of Ferris Baker Watts. "It's impressive to achieve those rates with part of your fleet out of service during the quarter."

Dry docking is an industry requirement. Ships must undergo dry-dock repairs twice every five years.

Hopkins says another major factor helping Excel is that dry-bulk trade volume will outstrip the incremental tonnage, or ships, hitting the market by the end of this year.

"The supply of new ships is constrained by worldwide shipyard capacity, which is so heavily booked today that some new orders won't be delivered for a few years," Hopkins said. "Excel will be able to capture higher rates, which are likely to increase through 2007 and 2008."
Clarksons Research forecasts total dry-bulk fleet capacity to grow 6% to 395.3 million deadweight tons in 2007, before slowing to 5.6% in 2008. The firm sees the total bulk trade rising 4.8% to 2.97 billion metric tons by the end of this year.

In 2007 alone, demand will outstrip supply by the equivalent of 55 panamax vessels.
Also fueling demand is port congestion; 9% to 10% of the ships waiting to be loaded or unloaded at international ports are tied up, Hopkins says.

"A lot of this is in Australia and Brazil, where ports have trouble handling the larger vessels," he said. "But delays don't affect bulk shippers, because customers are on the clock under time charters while ships sit idle in port."

Grain Trade

With the North American grain trade on the horizon, Excel's panamax ships will be in high demand.

Mavrinac says North American grain exports historically increase 44% from August to October. That will require an additional 15 panamax ships in the second of half of this year.

Excel recorded $110 million in cash on its balance sheet at the end of the second quarter. The firm will use that money to help make acquisitions. It has one of the strongest balance sheets in the dry-bulk peer group, Mavrinac says.

In July, Excel bought two supramax vessels for $63 million each. The two ships will add a combined 108,773 deadweight tons to its fleet, for a total capacity of more than 1 million deadweight tons.

"When the acquisition of the two supramax vessels (is completed), we will have expanded our fleet to 18 vessels, while lowering our average fleet age to 12.9 years," Georgakis said in a press release, "thus adding capacity and diversity to our fleet at a time of high customer demand and robust freight rates."