Hong Kong-listed dry bulk ocean shipping company Pacific Basin, which operates a fleet of about 246 vessels, made a narrow profit in the first half. Profit levels sank because of a tough market. The company is forecasting better times to come, due in no small part to the impact of the IMO 2020 low sulfur fuel regulations.
Pacific Basin (HKEX:2343) announced a net profit of US$8.2 million for the six months ending June 2019. (All monetary figures are in U.S. dollars.) This profit was down from $30.8 million in the first half of 2018. EBITDA rose to $101.1 million from $99.3 million.
Commenting on the overall financial results, CEO Mats Berglund said that the company’s results for the first half of 2019 “were supported by… our competitive cost structure, but adversely affected by markedly weaker dry bulk freight market conditions.”
Revenues for the first half of the year stood at $767.1 million, down by 3.58 percent from $795.6 million recorded in the same period in 2018.
The cost of services marginally declined from $751.1 million in the first six months of 2018 to $735.9 million in the current period.
Also affecting profit levels was a large drop in “other income and gains” which declined from $8.06 million to $367,000. However, there was also a large fall in “other expenses” from $1.74 million to $189,000.
Pacific Basin’s balance sheet showed a $173 million increase in its non-current assets to $2.02 billion. There was a reduction of $9.63 million in current assets to $512.95 million. Non-current liabilities rose by $107.8 million to stand at $860.95 million. Current liabilities increased from $382.17 million to $431.20 million. So the company is immediately solvent with a current ratio of 1.19. But that ratio is declining – in the previous comparable period it was 1.37.
The company has secured a syndicated $115 million, seven-year, reducing revolving credit facility (i.e. an overdraft-like facility) secured against 10 previously unmortgaged ships at an interest cost of London Inter-Bank Offered Rate plus 1.35 percent. As of June 30, 2019, the company had cash and deposits of $314 million “providing sufficient liquidity to repay the $125 million convertible bonds in full.”
As of June 30, 2019, Pacific Basin operates 134 handysize ships of which 82 are owned and 52 are chartered. It operates 110 supramax vessels of which 30 are owned and 80 are chartered. It also operates two post-panamax ships of which one is owned and operated. It therefore owned 113 ships at the end of June 2019 and it operated 246 vessels. However, it also had an extra two supramaxes delivered into the fleet in July.
Performance review
Pacific Basin recorded ship operating expenses of $3,900 per day along with general and administrative overheads of $730 per day. It also recorded financing costs of $820 per day.
The company recorded handysize daily time charter earnings of $9,170 per day and supramax daily time charter earnings of $10,860 per day. These figures were down 6 percent and 7 percent year-on-year.
However, the company was quick to point out that this was a marked overperformance when compared to industry indices. The Baltic Handysize Index time charter equivalent rate fell from about $9,000/day in the fourth quarter of 2018 to under $6,000/day in the first and second quarters this year. It was a similar story for the Baltic Supramax Index, which stood at about $11,000 to $12,000/day in the fourth quarter of 2018 but fell to about $8,000 in the first and second quarters of 2019.
Market analysis
A number of factors were put forward to explain the slump in dry bulk rates. These included a reduction in soybean exports from the U.S. and a reduction in the volume of the U.S. to China soybean trade because of international tensions. And flooding in the U.S. Midwest and along the Mississippi River hampered U.S. grain exports, the company said. Brazilian miner Vale’s tragic woes with dam failures disrupted the iron ore market. Cyclones also disrupted the iron ore trade as it put the west coast Australian iron ore export ports out of business for a short while. The company added that the first half of the year is traditionally weak owing to such events as Chinese New Year.
Market: forward looking
Pacific Basin believes that the markets are recovering after the Chinese New Year holidays. An easing of export disruptions in Brazil and demand growth for the minor bulks (such as for nickel, manganese and bauxite, among others) also “bode well” for the dry bulk market, the company stated.
The company added that the U.S. is returning to normal volumes of soybean exports and that “strong volumes” are being exported out of the Black Sea region and from South America, particularly Argentina.
The company also particularly discussed IMO 2020, which is the new international regulation from the United Nations’ International Maritime Organization. It will cut the allowable amount of sulfur in fuel from 3.5 percent by weight to 0.5 percent by weight. According to research consultancy Wood Mackenzie, the global marine sector consumed 3.8 million barrels per day of fuel oil in 2017 and the sector is responsible for half of global fuel oil demand.
Pacific Basin said that it is not installing scrubbers on its 82 strong-owned handysize fleet but that it will be putting scrubbers on many of its 30 strong-owned Supramax fleet.
The company stated that IMO 2020 will have a two-fold beneficial effect on the dry bulk market. First, many vessels will temporarily be taken out of service for the installation of scrubbers. A normal dry docking is about 15 to 18 days and Pacific Basin says that installing scrubbers will add a further 15 to 18 days out of service. It added that many dry bulk vessels have been repositioned from around the world to the Pacific for this purpose. With that capacity out of service it will add upward pressure on dry bulk freight rates.
Incidentally, Pacific Basin added that many of its ships also will be temporarily taken out of service this year for the installation of ballast water treatment systems.
The rest of Pacific Basin’s fleet – handysizes mostly – will be consuming expensive low sulfur fuel oil. Accordingly, it, and other shipping operators, will be incentivized to slow-steam and thereby consume less fuel than otherwise. Slow steaming will also take supply out of the ocean freight market and will therefore also add upward pressure to the dry bulk market, the company indicated during the discussion of its financial results late last night Hong Kong time.
“We expect the majority of the global dry bulk fleet, especially smaller vessels such as Handysize ships, will comply by using more expensive low-sulphur fuel,” Berglund said.
Note: unfortunately, we made an error in the original version of this story and incorrectly attributed a statement to Mr Bergland that the company believed the majority of the world’s dry bulk fleet would install scrubbers, when, in fact he said that they would likely be using low sulfur fuel. We apologise for the error and inconvenience. Sorry. This story was corrected on August 1, 2019.