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Unformatted text preview: Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification, Investment Banking, Ratings Definitions, and potential conflicts of interest begin on Page I of the Appendix Section. 800 Shades Creek Parkway Suite 700 Birmingham, AL 35209 205-949-3500 Sterne, Agee & Leach Inc. is Member NYSE, FINRA, SIPC January 18, 2011 Industry Report S HIPPING CHOPPY SAILING AHEAD ON HIGH SUPPLY GROWTH; LOW LEVERAGE NAME OF THE GAME; INITIATING COVERAGE OF DRY BULK • Initiating Coverage of the Dry Bulk Sector in a Challenging Supply Environment. We are initiating coverage of three of the major dry bulk shipping companies: Diana Shipping Inc. (DSX - $12.52 – Buy), DryShips Inc. (DRYS - $5.25 – Neutral), and Eagle Bulk Shipping Inc. (EGLE - $4.91 – Neutral). Despite a solid dry bulk commodity demand environment of 6.6% growth in 2011 and 6.2% in 2012, we believe that the large orderbook will result in net fleet growth of 13% in 2011 and 11% in 2012—levels which are already adjusted for our estimate of a 40% non-delivery rate due to order deferrals and cancellations. Even with our assumption of 1% length of haul expansion and increased port congestion increasing voyage times by 1%, we believe the dry bulk market will have to contend with a 4%+ supply/demand imbalance in 2011 and a roughly 3% imbalance in 2012, which we believe will put downward pressure on dayrates. Our spot rate forecast calls for a 16% and 9% decline in the Baltic Dry Index in 2011 and 2012, respectively. The declines are more heavily skewed toward Capesizes, which tops the fleet growth charts at 17% and 14% for 2011 and 2012, respectively. • Dry Bulk Demand Growth Driven By A Return of Iron Ore Demand—Particularly From China. We believe iron ore demand will increase 8.7% in 2011, a ramp up from an estimated 7.2% growth rate in 2010, and comprising almost 40% of the growth in overall dry bulk ton demand. The main driver of the iron ore demand growth is China, which we believe will increase its imports by 10% in 2011, after a 3% decline in 2010. China’s return to iron ore growth will be driven by inventory drawdowns that resulted in a decline in seaborne imports in 2010. We also expect to see total coal growth of 6%, a more normalized level after the 14% growth rate in 2010 (helped by easy comps vs. the roughly flat coal volume in 2009). Despite our view of expanding ton miles—especially on the iron ore import front—as the Pacific Iron Ore import gap increases (the amount of iron ore the Asian importers have to import from the longer haul Brazil to Asia route), we believe that the excessive supply growth will be too much to be absorbed by demand....
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