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We downgrade our recommendation on Excel Maritime Carriers Ltd. to Underperform backed by the gloomy prospects of the drybulk shipping industry. This sector is facing serious challenges, and therefore the spot vessel rates collapsed significantly. We believe the sole reason for this dismal condition is the sheer increase of ships under operation that resulted in intense price competition.

The spot rates of drybulk vessels have fallen to such a low level that even surging commodity prices in the Asian markets failed to offset the loss of the vessel owners.  We believe continuation of this pricing trend will certainly jeopardize the company’s future financials. In the second quarter of 2011, Excel Maritime barely met the Zacks Consensus Estimates. However, the company took a severe hit on its time charter equivalent rate. Additionally, its balance sheet is highly leveraged. We do not find any near-term catalyst for Excel Maritime.

Capesize vessels, which are mainly used for drybulk goods, faced a major brunt of this competition. In the spot market, capesize vessel rate fell below the operating costs. In contrast, capesize vessel rate was a massive $40,000 per day just a year ago when the economy was reeling under recession. 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 $18,932, a stiff reduction of nearly 21.3% year over year.

The drybulk shipping industry is also cyclical together with volatility in charterhire rates and profitability.Excel Maritime operates under highly competitive drybulk shipping industry. Its main competitors are Diana Shipping Inc. (DSX - Snapshot Report), Genco Shipping & Trading Ltd. (GNK - Snapshot Report), and DryShips Inc. (DRYS - Analyst Report).

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