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Large orderbook to hinder 2011 dry bulk market rebound despite increased demand says Paragon Shippin

Wednesday, 15 December 2010 | 11:26

A large orderbook which currently stands at 53% of the existing fleet is expected to render 2011 another challenging year for the dry bulk market. According to Mr. Michael Bodouroglou, Chairman and CEO of Paragon Shipping Inc., in an interview with Hellenic Shipping News Worldwide, "œwe believe that 2011 should be a challenging year due to the amount of new vessels

that are expected to hit the water during the year".
Providing with an explanation on the flurry of newbuilding orders this year, Mr. Bodouroglou said that current newbuilding prices are 12% below where the prompt resale values are, "so we do believe that the newbuilding market offers the best value in the drybulk sector" he said.

Paragon Shipping recently posted its third quarter and nine-month results. Which were the key performance figures you would highlight?

Despite the turbulence in the markets of the past two years, our chartering strategy enabled us report our 13th straight profitable quarter since we went public in 2007.  This past quarter, there was a lot of activity, and we diversified into the containership market, and expanded our fleet without risking our balance sheet and maintaining our dividend.  In addition, our adjusted EBITDA was $19.6 million in the third quarter, which was a $3 million improvement over the previous quarter, and our leverage remains at a moderate 57%.

What about your stock's valuation? Do you think that there is enough room for an increase?

Absolutely, we feel our stock is undervalued.  With our current charter coverage at 98% for 2011, our revenues are insulated from any market fluctuations that may occur next year and our stock price doesn't properly reflect this. Our time charter coverage makes us feel our stock price should be higher.

Do you think that this volatility of the market will continue in 2011 or will things be more stable going forward?

We believe that 2011 should be a challenging year due to the amount of new vessels that are expected to hit the water during the year.  Our outlook on the demand side is very positive, and we expect to see increased demand for iron ore and coal from the Asian markets during 2011. 
However, the orderbook remains very large with 53% of the existing fleet on order, and even with most analysts' predictions that continued slippage should be in the range of 30%-40% of the expected deliveries, we expect an oversupply of vessels in 2011, which should create a more volatile market next year.

Oversupply issues have plagued the dry bulk market this year. Are you more optimistic about 2011 or not, especially with regards to the Panamax segment where Paragon has an increased presence?

As I mentioned above, we remain concerned about the orderbook for 2011, and while the orderbook is the largest for Capesized vessels, at 60% of the current fleet, Panamaxes also have a large orderbook at 50% of the current fleet, so we expect to feel some pressure on rates in 2011. This is why we have been proactive in locking up 98% of our revenues for 2011, so that we are protected against a decline in freight rates next year.

This year we witnessed a strong rebound of newbuilding orders which are difficult to justify given the already huge orderbook. Are valuations really that low? What's your opinion on the matter?

In today's market, you can see that current newbuilding prices are 12% below where the prompt resale values are, so we do believe that the newbuilding market offers the best value in the drybulk sector. 
That is also why you continue to see newbuildings being ordered despite the large orderbook. 
We ordered seven newbuildings earlier this year, to be delivered between October 2011 and December, 2012, so we have backed up our view with action.

New building cancellations and scrapping of older bulkers seem to be the best chance that shipping has to improve freight rates. How is each of these solutions progressing since the beginning of the year?

Cancellations are very hard to measure, because neither the yards nor the shipowners have an incentive to announce them.  This year, it appears cancellations have stalled as the markets were much stronger than expected.  There have also been many new orders, which may have been new owners taking over someone else's order, but these types of deals may never become clear.  We continue to see a high amount of slippage, which will push the current orderbook out further, and hopefully extend the orderbook far enough out into the future so that demand will have time to catch up with supply.  In addition, vessel scrapings have decreased this year and unless rates are depressed for an extended period, there is no incentive to scrap older tonnage.  We would need a market where rates remain depressed for six to nine months before scrapings would be significant enough to offset new deliveries. This is also more pronounced with the smaller tonnage, as over 50% of the handysize fleet is older than 20 years of age, compared to only 16% for the capesize fleet.

How would you characterize the current market for second hand vessels? Are asset values corresponding to current freight rates?

We believe asset values are artificially inflated at current levels, and it is shown by the fact that the price of a five-year old Panamax is 11% above its 10-year historical average, compared to the one-year T/C rate that is 8% below its 10-year historical average.  To us, this signifies that second hand values are higher than they should be and that there is a disconnect in the current market between vessel values and freight rates.

Would you see investment opportunities in today's market conditions?

We have struggled looking for investment opportunities in today's markets, although we believe that in the drybulk sector, the Handysize vessels are the most attractive at the moment.  As we mentioned, over 50% of the fleet is older than 20 years of age, and it also has the smallest orderbook at the moment with 33% of the current fleet on order.  We feel Handysize vessels maintain stable earnings, even in declining markets and have the best supply/demand dynamic of the drybulk sector.

What about cargo demand in the future? Is a booming China enough on its own to sustain the global fleet growth?

While China continues to be the primary driver for the drybulk market, other Asian Countries, most notably, India, have also been growing at a significant pace, and it is no longer demand for Iron Ore alone that drives freight rates, it is also the increased demand for Coal. The combined demand for Coal imports from India and China has helped boost the markets in 2010, and we expect this to continue for the next several years.  As these Countries continue to build up their infrastructure, there will be an increased demand for energy, which should continue to drive increases in coal imports into China and India.  So while China alone may not be able to utilize new tonnage that is expected to enter the market in the coming years, the combination of China, India and the rest of the Asian markets should be able to absorb this tonnage over time.  We don't expect this to happen in 2011, although we expect the market to be stabilized by 2013.

Nikos Roussanoglou, Hellenic Shipping News Worldwide

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