Excel Maritime to Underperform

We downgrade our recommendation on Excel Maritime Carriers Ltd. (EXM) to Underperform backed by the gloomy near-term prospects of the drybulk shipping industry. This sector is facing serious challenges, where the spot vessel rates collapsed even below the rate during the recession. We believe the sole reason for this dismal condition is the sheer increase of ships under operation that resulted in intense price competition.

The drybulk shipping industry is going through a very difficult situation. Despite improving global macroeconomic scenario, the financial condition of this industry is worse than what it was a year or two ago. This is solely attributable to non-economic decision taken by the shipping companies in 2008 just before the starting of worldwide recession. Due to lack of near-term foresight, most of the vessel operators had ordered large number of newbuild ships in several docks. In 2010, total 210 newbuild ships were delivered and in 2011 another 241 ships are expected to be operational. Glut of ships resulted in severe cut-throat price competition.

The spot rate has fallen to such a low level that even surging commodity prices in the Asian markets failed to offset the loss of the vessel owners. Furthermore, Excel Maritime took a severe hit on its time charter equivalent rate in the last quarter. We believe continuation of this pricing trend may significantly jeopardize the company’s future financials. We do not find any near-term catalyst.

We believe continuation of the extreme low spot rate may also bring down fixed time charter rate. This may severely impact the overall finances of Excel Maritime. In the previous quarter, the realized average daily time charter equivalent rate of Excel Maritime was $19,642, a stiff reduction of nearly 19.7% year over year. Excel Maritime operates under highly competitive drybulk shipping industry. Its main competitors are Diana Shipping Inc. (DSX), Genco Shipping & Trading Ltd. (GNK), and DryShips Inc. (DRYS).

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