winston wrote:Hi grandmaster89,
I was thinking of some of the risks on this counter:-
1) decline in spot rates
2) renewal of long term contracts at rates lower than the previous rates
3) long term rates locked in at very low rates
4) new supply of ships
5) China and India importing less commodities
What do you see as some of the risks associated with this counter ?
Take care,
Winston
Throw in the possible increase in fuel price and you would have listed all the possible risks associated with this investment.
1) 30% of MLS revenue is derived from spot rates. I believe this will have a negative impact on the revenue and profitability of MLS if BDI comes into downward pressure.
2) We haven't see any renewal of contracts yet. All eyes are on Mittal contract which expire in Aug 10.
3) There are 2 contracts negoitated this year - Cosco and Vale. Cosco contract will yield around 14.2K/day gross profits (39.5 - 25.3) which is equivalent to 5 mil a year. Mercator has a 14 year contract with Vale to use the VLOC and transport iron ore to China at 209mil approx = 14.92mil annual revenue. Both rates are not entirely unreasonable at the current economic climate.
4) This is a macro economic risk. Substantial number of ships has been delayed/cancelled/scrapped this year. As a result, only 40% of the outstanding 2009 order book has been delivered this year. Despite this, the average fleet growth will be around 6% this year. However the BDI has already priced this growth in.
5) This is a massive risk. This boils down to - Do you believe in the Indian and Chinese growth story? If yes, then commodities import will rise tremendously over the next decade.
I have a question though - Any clue whether the contract with Zuhai Yufeng steel will carry on? Mercator used the VLOC, originally scheduled for it, to charter Vale's contract. The contract with Zhuhai Yufeng
steel, for which this VLOC was initially scheduled, is proposed to be executed through another vessel to be chartered- in. Its been half a year since then, will Mercator charter another VLOC?