Shipping Sector Sinking : Capesize Rates Collapse with Coal / China Imports

“It looks like the market is going to continue being a big disappointment”

A deeper slump in earnings for ships that carry most of the world’s coal and ore cargoes would force owners to take vessels out of service, according to shipbroker RS Platou Markets AS.

Average daily earnings for Capesize ships fell to $3,735 today, the lowest in more than two years, according to data from the Baltic Exchange in London. Rates will probably remain low next year, according to Herman Hildan, shipping analyst at Platou.

“At the moment, they’re barely covering their operating costs,” Hildan said by phone today from Oslo. “It doesn’t make sense for owners to participate in fixing vessels” if rates fall further.

Signs of slowing growth in China, the world’s largest importer of thermal coal and iron ore, have caused a collapse in Capesize rates of about 90 percent this year. China’s economy will expand by 7 percent next year, the slowest growth in a quarter century, according to economist forecasts in a Bloomberg survey. Customs data showed a slump in ore imports in November.

Hildan’s own estimates show Capesize vessels are currently earning $6,900 a day on average. Shippers would begin taking their vessels out of service when the daily rate falls below $5,000, he said.

The rate for the vessels, which can carry as much as 160,000 metric tons of iron ore, has averaged $13,923 in 2014, according to Baltic Exchange data. Analysts were expecting daily earnings of $18,500, according the median of estimates gathered by Bloomberg in January.

“It looks like the market is going to continue being a big disappointment” in 2015, Hildan said.

It is human nature to look for bargains - and destroy your portfolio as you gather losers into what used to be a ” nest” egg.

Look at Seeking Alpha and count the ” analysts” saying Dryships ( DRYS) is going to turn – how none forecast the sub dollar level it now enjoys.

What To Do ?

Here is our recent letter(the section on shipping)

Managed Accounts Year End Review and Forecast

Shipping Sector / Bulk ShippersYou can review our stock market letter at http://www.amp2012.com to follow our profits in the shipping sector before our retreat as overcapacity has yet to effect continued overbuiding. In 2008-9 rates-  illustrated by the Baltic Dry Index – were at their peak. The BDI hit over 10,000. Today it is roughly 10 % of that benchmark and the sector slide continues. We have an impressive watchlist of former ” darlings” – but we are content to watch and wait.

Have you avoided these sectors – you would have been better off to follow our advice in 2014 and now you have to decide for 2015.
No one – and I am not being humble here – can project the future with great accuracy but our clients continue to do very well and we offer that experience to you.

Fees : 1 % annual set up and a performance bonus of 20 % – only if we perform.

You can withdraw your funds monthly if you require an income stream.

Alternate Guaranteed Income Payments

Private client funds Minimum $10,000 Maximum Loan $500,000

Our client is seeking funds to expand their tanker fleet .

Interest 12 % compounded – paid 1% per month

Floating charge of the full $500,000 against the fleet – valued at  more than $ 1 M

Contact information:

To learn more about portfolio management ,asset protection, trusts ,offshore company formation and structure for your business interests (at no cost or obligation)

Email

jackabass@gmail.com OR

info@jackbassteam.com  OR

Call Jack direct at 604-858-3202

10:00 – 4:00 Monday to Friday Pacific Time ( same time zone as Los Angeles).

Similar to wise buying decisions, exiting certain underperformers at the right time helps maximize portfolio returns. Selling off losers can be difficult, but if both the share price and estimates are falling, it could be time to get rid of the security before more losses hit your portfolio.

Tax website  Http://www.youroffshoremoney.com

 

Lor Loewen's photo.

Scorpio Tankers

STNG 

NYSE Update HOLD

HOLD
unchanged
PRICE TARGET US$9.00
unchanged
Price (17-Dec)
Ticker
US$8.19
Company Update

 Scorpio announces an update to its fleet

Purchase of four newbuild LR2s with two additional options
Agreements in place to sell three older vessels

Delivery of six newbuilding product tankers

• STNG agreed to acquire four newbuild slots from Scorpio Bulkers (SALT) with an option
for two additional vessels. These contracts were originally placed by SALT for Capesize
vessels at Korean shipyards, but will be modified to LR2 product tankers. Each vessel
will cost $51 million and they are expected to be delivered in 2016. The price for the
two option vessels is fixed at $52.5 million, and the options are declarable by May 31,
2015. If exercised, these vessels will be delivered in Q4/16.

• Management noted on the call that there are no related party or third party fees
associated with this deal. We estimate the purchase price for the ships are at a
modest discount to current asset values. No financing is in place for this acquisition,
and new credit facilities will be needed to fund this deal.

• We believe this is a modest positive to the story as it expands their fleet in a sector
that we think has good prospects going forward (LR2s) at a price below NAV.
• Scorpio also announced they have agreed to sell three of their older vessels, the STI
Harmony, STI Heritage and the Post-Panamax Venice, for total consideration of $74
million. In connection with this deal, STNG will record a write-down of $2.6 million for
Q4/14.
• Finally, the company announced that they have taken delivery of the LR2 STI Condotti,
which is on charter for 55 days at approximately $30,000/day. The company took
delivery of the MR tankers, the STI Battery and STI Soho which are on 120 day
charters at $18,000 per vessel/day. The three Handymax product tankers, the STI
Finchley, STI Clapham and the STI Poplar, are on 120-day charters at $14,000 per
vessel/day. With these six deliveries, the company now has 25 newbuild deliveries
expected through 2016.

Valuation
Our forward, normalized NAV (2016E) is $8.77 per share. As such, we believe the stock is
somewhat above fair value and feel there are more underfollowed names that are better
ways to play the tanker market. Our $9 price target is based on a 1.0x multiple to our
forward, normalized NAV.

Get Out Of The Oil Patch, Get Out of Dry Bulk Shipping – New Paradigm Update

It is human nature to look for bargains - and destroy your portfolio as you gather losers into what used to be a ” nest” egg.

Look at Seeking Alpha and count the ” analysts” saying Dryships ( DRYS) is going to turn – how none forecast the sub dollar level it now enjoys.

“We could definitely see $55 next week,” said Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors. “We are probably going to see some violent trading.”

‘Drifting Down’

Skip York, a Houston-based vice president of energy research at Wood Mackenzie Ltd., said the next price target is $45.

“The market hasn’t seen the response they’re looking for on the supply side yet,” York said. “We’re now in this environment where I think prices are going to keep drifting down until the market is convinced, until the signal that production growth needs to slow has been received and acted on by operators.”

Are you still a client of a portfolio manager urging you to ” stay the course” – or worse, telling you to add to losing positions and losing sectors?

small- and mid-capitalization stocks, both E&P and Oil Service, are trading ~60% below their recent peaks, on average.

  • A growing number of stocks are priced at less than one-quarter of their peak prices achieved less than six months ago.

This is what is happening to oil TODAY ( Friday Dec. 12)

U.S. oil drillers, facing prices that have fallen below $60 a barrel and escalating competition from suppliers abroad, idled the most rigs in almost two years.

Rigs targeting oil dropped by 29 this week to 1,546, the lowest level since June and the biggest decline since December 2012, Baker Hughes Inc. (BHI) said on its website today. Those drilling for natural gas increased by two to 346, the Houston-based field services company said. The total count fell 27 to 1,893, the fewest since August.

As OPEC resists calls to cut output, U.S. producers from ConocoPhillips (COP) to Oasis Petroleum Inc. (OAS) have curbed spending. Chevron Corp. (CVX) put its annual capital spending plan on hold until next year. The number of rigs targeting U.S. oil is sliding from a record 1,609 following a $50-a-barrel drop in global prices, threatening to slow the shale-drilling boom that’s propelled domestic production to the highest level in three decades.

“It’s starting,” Robert Mackenzie, oil-field services analyst at Iberia Capital Partners LLC, said by telephone from New Orleans today. “We knew this day was going to come. It was only a matter of time before the rig count was going to respond. The holiday is upon us and oil prices are falling through the floor.”

ConocoPhillips said Dec. 8 that the Houston-based company would cut its spending next year by about 20 percent, deferring investment in North American plays including the Permian Basin of Texasand New Mexico and the Niobrara formation in Colorado. Oasis, an independent exploration and production company based in Houston, said Dec. 10 that it’s cutting 2015 spending 44 percent to focus on its core area in North Dakota.

What To Do ?

Here is our recent letter:

Managed Accounts Year End Review and Forecast

November 2014 – 40 % cash position
Gold and Precious MetalsThe largest gains for our clients came from the exit from the gold producers at $18oo an ounce and continuing until we hold no gold and no gold miners . This from the author of The Gold Investors Handbook.2015 – We continue to be on the sidelines for this sector – regardless of the gnomes of Switzerland . As a safe haven gold simply wasnot there for investors despite turmoil in the Middle East, Africa and Ukraine.How much more frightening can the prospect for peace be than to have wars in multiple locations? Secondly the spectre of inflation – on which I have given numerous talks – simply failed to materialize. In fact economists and portfolio managers such as myself are now more concerned about deflation – and the spectre is a Japanese style decades long slide in the world economy.
Shipping Sector / Bulk ShippersYou can review our stock market letter at http://www.amp2012.com to follow our profits in the shipping sector before our retreat as overcapacity has yet to effect continued overbuiding. In 2008-9 rates-  illustrated by the Baltic Dry Index – were at their peak. The BDI hit over 10,000. Today it is roughly 10 % of that benchmark and the sector slide continues. We have an impressive watchlist of former ” darlings” – but we are content to watch and wait.
Oil/ EnergyI am very happy for the call in natural gas prices – out at $12 and into oil. When oil was above $100 we lessened positions and that is our saving grace in the past two weeks. We are not bottom feeders and will wait for a turn in the market before reentering drillers or producers.On Friday November 27th, crude oil prices dropped to below $72 and the slide has continued into the weekend, with Brent crude oil at $70.15 as I write this post. Shares of major oil companies traded down on Friday. Our former energy sector holdings are down another between 4% and 11%, including SDRL, which dropped another 8% following Wednesday’s 23% plunge…

Have you avoided these sectors – you would have been better off to follow our advice in 2014 and now you have to decide for 2015.
No one – and I am not being humble here – can project the future with great accuracy but our clients continue to do very well and we offer that experience to you.

Fees : 1 % annual set up and a performance bonus of 20 % – only if we perform.

You can withdraw your funds monthly if you require an income stream.

Alternate Guaranteed Income Payments

Private client funds Minimum $10,000 Maximum Loan $500,000

Our client is seeking funds to expand their tanker fleet .

Interest 12 % compounded – paid 1% per month

Floating charge of the full $500,000 against the fleet – valued at  more than $ 1 M

 

Contact information:

To learn more about portfolio management ,asset protection, trusts ,offshore company formation and structure for your business interests (at no cost or obligation)

Email

jackabass@gmail.com OR

info@jackbassteam.com  OR

Call Jack direct at 604-858-3202

10:00 – 4:00 Monday to Friday Pacific Time ( same time zone as Los Angeles).

Similar to wise buying decisions, exiting certain underperformers at the right time helps maximize portfolio returns. Selling off losers can be difficult, but if both the share price and estimates are falling, it could be time to get rid of the security before more losses hit your portfolio.

Tax website  Http://www.youroffshoremoney.com

 

Lor Loewen's photo.
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Teekay LNG Partners LP BUY – LNG Is The Only Viable Portion of Shipping Sector

TGP

 NYSE : US$38.06 BUY 
Target: US$46.00 

COMPANY DESCRIPTION:
Founded in 2004, Teekay LNG Parters (TGP) is the third
largest independent owner of LNG carriers. TGP was
organized as a publicly-traded master limited partnership by
Teekay Corporation (TK) as part of its strategy to expand its
LNG and LPG shipping sectors. TGP provides seaborne
transportation of LNG, LPG and crude oil under long-term,
fixed-rate time charter contracts.
All amounts in US$ unless otherwise noted.

 

Energy — Maritime
TEEKAY IS A-OK
Investment recommendation
We are initiating coverage of Teekay LNG Partners (TGP) with a BUY
rating and a $46 price target. Teekay’s strategy of growing organically
primarily through joint ventures with vessels fixed to long-term
contracts is ideally suited to the nature of the LNG business.
Investment highlights
 Substantial long-term charter coverage leads to cash flow visibility:
Teekay’s LNG fleet has substantial charter coverage, with an
average remaining contract length of 14 years. Long-term charter
coverage is critical for shipping MLPs in order to provide stability to
cash flows and maintain the safety of the distribution.
 Organic growth should drive distribution increases: With 15 LNG
vessels and 10 LPG vessels expected to be delivered through 2020,
Teekay LNG already has significant built-in growth. We expect a 6%
net income per distribution CAGR through our forecast period
(2017). The company’s growth profile is heavily weighted to 2017+,
which is when we expect the LNG market to be most robust.
 Leader in developing new technologies: The company was a leader
in developing LNG vessels with the new MEGI engine, which
provides substantial fuel savings to charters. While this is one of the
rare cases where ships were ordered by Teekay without charters
attached, the gamble paid off as five of the remaining vessels
(including options) were recently chartered to Shell for 6-8 years.
Valuation
Our $46 price target is based on dividend discount model using a 9%
discount rate and 3% distribution growth rate.
Risks
Geopolitical risks may hinder LNG projects in Russia from coming
online, and delays/cancellations of planned LNG export terminals in
North America and elsewhere may negatively impact fundamentals.

Tax website http://www.youroffshoremoney.com

Management  http://www.jackbassteam.com

Shipping Sector Drops With Oil Sector – Don’t Try To Pick The Bottom

Tonnage Keeps on Coming – sector keeps drifting to the reefs

Dry Bulk Forecaster

London, UK, 8th February 2012 – Drewry Maritime Research’s latest edition of its Dry Bulk Forecaster pulls no punches in its assessment of a market that looks certain to continue hitting dry bulk shipowners hard.

Tonnage supply hit a massive 605 million dwt at the end of 2011, an increase of 15.2%, which is even more impressive considering 19 million dwt was removed in the same period. With rates suffering under current market conditions Drewry’s forecast for the fleet hitting 684 million dwt by the end of 2012 and 765 million dwt by the end of 2016 signals daunting prospects for the future.

The near future will play heavily on supply-side fundamentals, as ships continue to hit the water at a very fast pace. Given the colossal delivery schedule and slippage from previous years, deliveries in 2012 are forecast to increase further to 97.6 million dwt. The largest increase in deliveries is foreseen in the VLOC segment, where a total of 16.5 million dwt of tonnage will hit the water compared with only 8.9 million dwt in 2011. In light of
China’s recent ban on such vessels, this could mean further headaches for owners.

Demolition in this over-supplied market totalled 19.1 mdwt in 2011, nearly quadruple that of the preceding year, as the ailing hire market forced owners to retire older ships. 2012 levels are forecast to reach almost the same as 2011 due to the declining average demolition age of vessels. However the Capesize segment is set to see a decline in demolition levels as most of the obsolete vessels were already demolished in 2011. In the longer forecast period all demolitions are expected to decline, to total 10.6 mdwt in 2016.

Shalini Shekhawat, a dry bulk analyst at Drewry stated, “It’s not all bad news for the sector as Drewry forecasts a 4% growth in trade for 2012, increasing yearly to a rate of 5.8% come 2016, which considering growth stood at less than 1% in 2011 is a boost for the market . Coupled with an orderbook that has been shrinking since February 2009, when it sat at 295 million dwt, there are glimmers of hope that the serious issue of over supply can start to be addressed.”

The AMP Year End Forecast – right on oil and the shipping sector :

Here is our recent letter:

Managed Accounts Year End Review and Forecast

Managed Accounts Year End Review and Forecast
November 2014 – 40 % cash position
Gold and Precious Metals

The largest gains for our clients came from the exit from the gold producers at $18oo an ounce and continuing until we hold no gold and no gold miners . This from the author of The Gold Investors Handbook.

2015 – We continue to be on the sidelines for this sector – regardless of the gnomes of Switzerland . As a safe haven gold simply wasnot there for investors despite turmoil in the Middle East, Africa and Ukraine.How much more frightening can the prospect for peace be than to have wars in multiple locations? Secondly the spectre of inflation – on which I have given numerous talks – simply failed to materialize. In fact economists and portfolio managers such as myself are now more concerned about deflation – and the spectre is a Japanese style decades long slide in the world economy.

Shipping Sector / Bulk Shippers

You can review our stock market letter at http://www.amp2012.com to follow our profits in the shipping sector before our retreat as overcapacity has yet to effect continued overbuiding. In 2008-9 rates-  illustrated by the Baltic Dry Index – were at their peak. The BDI hit over 10,000. Today it is roughly 10 % of that benchmark and the sector slide continues. We have an impressive watchlist of former ” darlings” – but we are content to watch and wait .

Oil/ Energy

I am very happy for the call in natural gas prices – out at $12 and into oil. When oil was above $100 we lessened positions and that is our saving grace in the past two weeks. We are not bottom feeders and will wait for a turn in the market before reentering drillers or producers.

On Friday November 27th, crude oil prices dropped to below $72 and the slide has continued into the weekend, with Brent crude oil at $70.15 as I write this post. Shares of major oil companies traded down on Friday. Our former energy sector holdings are down another between 4% and 11%, including SDRL, which dropped another 8% following Wednesday’s 23% plunge:

Company                                   (Ticker)                        Price Change
Energy Transfer Partners LP (NYSE:ETP)             $ 65.17 -4.13%
Exxon Mobil Corporation (NYSE:XOM)                $ 90.54 -4.17%
Chevron Corporation (NYSE:CVX)                       $108.87 -5.42%
ConocoPhillips (NYSE:COP   )                                 $ 66.07 -6.72%
Vanguard Natural Resources, LLC (NASDAQ:VNR) $ 23.22 -6.86%
Seadrill Ltd. (SDRL)                                                  $ 14.66 -8.32%

Have you avoided this sector – you would have been better off to follow our advice in 2014 and now you have to decide for 2015.
No one – and I am not being humble here – can project the future with great accuracy but our clients continue to do very well and we offer that experience to you.

Fees : 1 % annual set up and a performance bonus of 20 % – only if we perform.

You can withdraw your funds monthly if you require an income stream.

Contact information:

To learn more about portfolio management ,asset protection, trusts ,offshore company formation and structure for your business interests (at no cost or obligation)

Email

jackabass@gmail.com OR

info@jackbassteam.com  OR

Call Jack direct at 604-858-3202

10:00 – 4:00 Monday to Friday Pacific Time ( same time zone as Los Angeles).

Similar to wise buying decisions, exiting certain underperformers at the right time helps maximize portfolio returns. Selling off losers can be difficult, but if both the share price and estimates are falling, it could be time to get rid of the security before more losses hit your portfolio.

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Star Bulk Carriers ( and the shipping sector)

SBLK : NASDAQ : US$$6.46

BUY ? – not just yet 
Target: US$19.00

Disclosure : Our managed accounts sold all shipping stocks – part of the reason we are 40% cash – see the Year End Review at http://www.youroffshoremoney.com
SBLK is on our watchlist.

COMPANY DESCRIPTION:
Star Bulk Carriers is a global dry bulk shipping company
incorporated in the Marshall Islands in December 2006. The
company is headquartered in Athens, Greece and specializes in
the Capesize and Supramax segments of dry bulk.
All amounts in US$ unless otherwise noted.

 The Shipping Sector NOT A BLACK HOLE

Investment recommendation
We maintain our BUY rating, but are lowering our price target to $19
(from $21). Star Bulk continues to be our favorite name in the dry bulk
space due to its sizeable, modern fleet and low cost basis. We continue
to believe the company will be a beacon for future consolidation in the
industry.

Investment highlights

 Funding gap worries overblown: While a substantial portion of the
company’s capital expenditure requirements have secured
financing, there still remains an estimated $103 million equity
funding gap to be filled through 2016. The recent issuance of $50
million of unsecured notes helped lower that number and give
management time. We believe a combination of operating cash flow
generation, further unsecured notes, or equity-linked securities
could get the company the rest of the way in a manner that
minimizes equity dilution.
 Growth into 2015 and 2016 should remain strong: With 20 of the
34 vessels from the Excel fleet acquired year-to-date, the remaining
14 vessels expected by year-end, and 35 newbuilds by the end of
2016, we expect earnings growth should ramp up in Q4/14 going
into 2015.

Valuation

Based on our expected 2016 year-end balance sheet and fully delivered
fleet at that time, we calculate Star Bulk’s forward, normalized NAV to
be $18.96 per share. As such we believe that SBLK is undervalued and
we maintain our BUY rating, but lower our price target to $19 (from
$21). Our target is based on the average of our two forward NAVs.
In terms of vessel operating expense, we look for the company’s Capesize vessels to run
$6,300 per vessel/day, Post-Panamax vessels to run $5,500 per vessel/day, and the
Supramax vessels to run $5,100 per vessel/day, and we expect those numbers to increase
with inflation in 2015 and 2016. For drydocking, we note that the company expenses
drydocking (instead of capitalizing and depreciating it), which has a tendency to cause
some earnings volatility from period to period. We are expecting drydocking of $8 million
in 2014, $18 million in 2015, and $25 million in 2016. Finally, we look for G&A expenses
(including non-cash stock compensation) in 2014 through 2016 of $33 million, $39 million,
and $43 million, respectively, which equates to $1,000 per vessel/day by 2016 and $6
million of annual non-cash stock compensation. Given our revenue and expense forecast,
we estimate that the company will achieve operating EPS of ($0.13) in 2014, $1.15 in
2015, and $2.06 in 2016, and EBITDA of $27 million, $278 million, and $451 million,
respectively.
Balance sheet: The company ended Q3/14 with $96 million of cash versus $576 million of
debt. Going forward, the company has a fairly large newbuild program that it intends to
finance with 60% leverage. The company has total capital expenditure requirements $1.5
billion, with $934 million due in 2015 and $304 million in 2016. Out of this amount,
banking financing for $687 million is committed, $293 million is under negotiations (nine
ships), and $65 million is targeted (two ships). Equity requirements remaining are $216
million, of which management estimates there is a funding gap of $103 million. The recent
issuance of $50 million of unsecured notes helped bridge a portion of this gap and gives
the company time. We expect the remaining portion to be met from a combination of cash
flow from operations, further unsecured debt, equity-linked, or straight equity, with the
aim to minimize dilution. Based on our model, we assume another $50 million of
unsecured debt is issued later next year.

VALUATION

Our primary benchmark in evaluating shipping company valuations is price/charteradjusted
NAV. This metric takes into account the overall market value of a company’s
assets based on quoted prices from shipping brokers, adjusted for balance sheet items. In
particular, we believe it’s useful to also adjust for any charters that may be above or below
the current market based on a discounted cash flow relative to what we believe is the
consensus market forecast. Given that shipping in general is a highly cyclical industry, we
prefer to normalize NAV based on long-term historical averages, which we use as a proxy
for mid-cycle asset values.
We also supplement our NAV valuation with relative EV/EBITDA multiples. Given the
highly cyclical and volatile nature of the shipping industry, we find EBITDA to be a clearer
and more stable measure of earnings than reported net income. Furthermore, as the
shipping industry is capital-intensive, an EV/EBITDA valuation enables us to compare
companies with varying levels of debt on an equitable basis.
Price/NAV: We’ve calculated Star Bulk’s NAV to be $9.39, based on the Q3/14 balance
sheet and fleet at that time (41 vessels).

Dry Bulk Sector : we are still out of the sector – watchlist only

Dry Bulk Shipping

The dry bulk shipping industry is affected by numerous factors—like world economies’ growth and commodity supply and demand. Considering the various world economies, China’s economic growth rate impacts dry bulk shipper’s movement. China is an important commodity market.

The sell-off

Since the beginning of September 2014, dry bulk shipping companies—like Navios Maritime Holdings Inc. (NM), DryShips Inc. (DRYS), Knightsbridge Shipping Ltd. (VLCCF), and Safe Bulkers Inc. (SB)—have all suffered great losses.

NM fell by 47%. DRYS fell by 42.9%. VLCCF fell by 41.8%. SB fell by 35.8%.

The Guggenheim Shipping ETF (SEA) tracks a variety of major shipping companies worldwide. It fell by 17.8%. It underperformed the S&P 500. The S&P 500 decreased by 4.8%.

Important indicators

Why have these dry bulk shipping companies fallen so much over the last few months? What do the industry fundamentals look like? We’ll use key indicators to help us answer these questions throughout this series.

The dry bulk shipping companies transport dry bulk—like iron ore, coal, and grain—around the world using vessels.

China is one of the largest commodity importers in the world. China’s manufacturing and real estate sector remains a key driver of dry bulk trade throughout the world.

At an industry level, iron ore exports out of Australia and Brazil are key data points to follow. Since coal is used to generate electricity, we’ll take a look at China’s recent thermal power output trends.

To gauge industry players’ sentiment and expectations of the industry outlook, we’ll look at newbuild and second-hand vessel prices. We’ll look at the Capesize and Panamax vessels in particular. We’ll also look at ship ordering activities.

We’ll provide the Baltic Dry Index’s fourth quarter outlook. We’ll also discuss analyst opinions on dry bulks—provided by RS Platou.

We’ll start by looking at the Baltic Dry Index. It’s an Index that reflects the overall rate of transporting dry bulks on water.

Why the Baltic Dry Index is decreasing

Baltic Dry Index

The Baltic Dry Index measures the cost of major raw materials. The raw materials are transported by sea in the global economy. It indicates a strict demand supply price situation. When the cost to move goods by ship is lower, there are less goods to ship.

The Baltic Exchange Dry Bulk Index is a combination of rates for different ship sizes. It factors in the average daily earnings of Capesize, Panamax, Supramax, and Handysize dry bulk transport vessels. Most of the vessel classes that make up the Index are at their lowest level for this time of year—since at least 2006. Capesize ships are an exception. They’re used to carry iron ore or coal cargoes of ~150,000 deadweight tonnage (or DWT).

September performance

The Baltic Dry Index recorded a decreased percentage in trading to 1,063 on September 30, 2014, from 1,151 at the beginning of the month. So far in October, the Index decreased more to 1,029 as of October 6, 2014. Capsizes pulled down the Index by the maximum rate. On a year-over-year (or YoY) basis, the Index recorded a decreased percentage from 2,115 on October 7, 2013. Since October 2, the iron ore ship charter cost—charter cost to ship iron ore—declined the most.

Impact on companies

How the Baltic Dry Tanker Index performs, especially its YoY growth, is one factor that has significant implications for dry bulk companies.

Historical trends suggest strong third and fourth quarters. Investors should watch the Index for any rate of increase.

As a result, the following dry bulk companies—like Star Bulk Carriers Corp. (SBLK), Safe Bulkers Inc. (SB) Baltic Trading Inc. (BALT), and Knightsbridge Tankers Ltd. (VLCCF), and the Guggenheim Shipping ETF (SEA)— could benefit in the short-term.

However, if the YoY changes remain in the negative, then the long-term outlook for these companies will remain in the negative
Company downgrades

Some of the largest names in the sector—including Capesize giant Knightsbridge Shipping Ltd (VLCCF) and Danish owner Norden—have also been downgraded in RS Platou’s recent quarterly report.

Knightsbridge is the largest Capsize owner listed in the U.S. It has been cut to sell from buy. Norden was downgraded to neutral.

Meanwhile, in the weaker dry cargo market, Platou also downgraded Diana Shipping (DSX) and Golden Ocean. It downgraded them from buy to neutral.

Platou analysts, Frode Morkedal and Herman Hildan, said that Knightsbridge is an attractive long-term investment vehicle. In the near term, weaker rates will bring a lower dividend.

Norden was downgraded to neutral. This was a result of the expected marginal rate improvement. It will pull its operating numbers back to black in 2015. However, the numbers won’t be at a level that justifies a higher stock price.

This could impact other companies in the industry like DryShips Inc. (DRYS), Safe Bulkers Inc. (SB), and the Guggenheim Shipping ETF (SEA).

Iron Ore Price Drop No Relief to Shipping Sector

Price drop will not increase demand from China – and not increase shipping demand.

Iron ore declined sooner than expected this year as supplies exceeded demand and prices are unlikely to recover, according to Goldman Sachs Group Inc., which said 2014 will mark the end of a so-called iron age.

This year “is the inflection point where new production capacity finally catches up with demand growth, and profit margins begin their reversion to the historical mean,” analysts Christian Lelong and Amber Cai wrote in a report today titled: “The end of the Iron Age.” The 2016 forecast for seaborne ore was cut to $79 a metric ton from $82 and the 2017 outlook was reduced to $78 from $85, according to the New-York based bank, which stuck with a forecast for $80 next year.

The raw material tumbled into a bear market this year as the biggest producers including Rio Tinto (RIO) Group expanded low-cost output, betting higher volumes would more than offset falling prices while less competitive mines were forced to close. The decline in prices came sooner than expected, according to Goldman, which said in November that iron ore would probably drop at least 15 percent this year. The commodity is seen in a structural downtrend, JPMorgan Chase & Co. said today.

“The price decline has been dramatic, but a weak demand outlook in China and the structural nature of the surplus make a recovery unlikely,” Lelong and Cai wrote. “Lower prices for iron ore and steel are unlikely to boost demand in a material way. Instead, the day when steel production in China will peak gets ever closer.

Lowest Level

Ore with 62 percent content at the Chinese port of Qingdao fell 39 percent to $82.22 a dry ton this year, the lowest level since September 2009, according to data from Metal Bulletin Ltd. The Bloomberg Commodity Index (BCOM), which doesn’t include iron ore as a member, lost 2 percent in the period. Within the index, soybeans fell the most.

Before the surplus emerged, iron ore supplies were tight and producers had above-trend profits even as costs increased, according to Lelong and Cai. That period, dubbed by the bank as the Iron Age, is now ending, they wrote.

“The current exploitation phase in iron ore could last for a decade,” the analysts wrote. “Iron ore markets went through a 20-year period of declining prices in real terms during the previous exploitation phase that ended in 2004.”

The global surplus will more than triple to 163 million tons in 2015 from 52 million tons this year, according to Goldman. The glut was seen expanding to 245 million tons in 2016 295 million tons in 2017 and 334 million tons in 2018.

Producers’ View

The biggest suppliers see higher prices. Ore may increase as the higher-cost output exits the market, Nev Power, chief executive officer of Perth-based Fortescue (FMG) Metals Group Ltd., said in an Aug. 20 interview on Bloomberg Television. Vale SA also sees prices rebounding as supply growth slows and mines close, Jose Carlos Martins, the Rio de Janeiro-based company’s head of ferrous and strategy, said on July 31.

Iron ore may see a dramatic recovery this half, Paul Gait, an analyst at Sanford C. Bernstein, said in a report on July 9, citing factors including a seasonal increase in the second six months and an end to China’s policy tightening. Asia’s largest economy accounts for about 67 percent of seaborne demand.

Credit growth in China missed estimates in July and new-home prices fell in almost all the cities the government tracks, putting pressure on policy makers to step up stimulus as they seek to meet an economic growth target of 7.5 percent.

About 110 million tons of global supply will close next year and a further 75 million tons in 2016, Goldman estimated in the report. While the majority of closures would be in China, seaborne producers will not go unscathed, it said.

Exceed Demand’

“New seaborne iron ore supply delivered into China is expected to exceed demand growth over the next three to four years,” Daniel Kang, an analyst at JPMorgan Chase & Co. in Hong Kong, said by e-mail in response to Bloomberg questions. “In short, we see iron ore in a structural downtrend.”

Rio Tinto, the biggest supplier after Vale, plans to boost output to more than 330 million tons in 2015, according to a company estimate. Vale will raise production 8.4 percent to 348 million tons in 2015. BHP Billiton Ltd. sees an 8.9 percent increase from its Western Australian mines in the year from July 1, while Fortescue may boost shipments by 25 percent.

Fortescue’s stock declined 32 percent in Australia this year, while in London Rio shares lost 5 percent and BHP rose 0.4 percent. In Brazil, Vale dropped 23 percent.

“The shift into structural oversupply is barely six months old but seaborne prices have already declined 38 percent year-to-date,” Lelong and Cai wrote. “Rather than representing the trough for this cycle, we believe the downward pressure is set to continue.”

 

Seeking Alpha Predicts Bankruptcy for Frontline ( FRO)

Please see our prior articles on the shipping sector – the light at the end of the tunnel appears to be moving farther from sight. NEWL went down to a zero valuation, others are gone but the rising inventory of ships and lack of economic ( world) recovery is still working its magic against the remaining players in the sector.
Summary

Frontline is now facing the likelihood of insolvency thanks to a $190 million bond coming due in April.
With three quarters to go until the note is due, rates would have to average around $40K for VLCC and $34K for Suezmax.
While the industry is heading into a cyclical high season, it’s unlikely rates will average what is needed.
Investors should avoid Frontline due to the risk of bankruptcy.

The Baltic Dry Index recovered from a low of below 800 to near 2000 before reversing again – now just over 1000 it is only 10 % of its prerecession high .

Don’t look to pick the bottom . Look to our other recommendations – like Tim Hortons to secure profits each quarter- just keep the shipping sector on a watchlist. It has great potential but they used to say the same thing about me.

Star Bulk Carriers : Where There Is Shipping There Is Hope

SBLK : NASDAQ : US$13.82 BUY 
Target: US$22.00

COMPANY DESCRIPTION:
Star Bulk Carriers is a global dry bulk shipping company
incorporated in the Marshall Islands in December 2006.
The company is headquartered in Athens, Greece and
specializes in the Capesize and Supramax segments of
dry bulk.

Energy — Maritime
EXCEL-LENT ACQUISITION
Investment recommendation
Earnings results came in higher than our estimates and slightly below
the consensus as Star Bulk benefited from a higher-than-expected Q2
dry bulk market. In addition, Star Bulk announced the acquisition of
Excel Maritime’s 34 dry bulk vessels. This acquisition will further
solidify Star Bulk as the largest US-listed dry bulk carrier and as such
we reiterate our BUY rating and our price target of $22.
Investment highlights
 Star bulk continues its consolidation spree: The Company
announced it agreed to acquire the old Excel Maritime fleet, which
was primarily controlled by Oaktree, in an NAV for NAV
transaction. We expected this to be the next step in the company’s
path to be a consolidator within the dry bulk sector. Ultimately, we
believe SBLK’s eventual size, scale, and liquidity will be highly
attractive for institutional investors looking to invest in the industry
and help create access to capital that will facilitate that role as a
consolidator.
 Operational efficiency: Star Bulk generated $2.2 million of cash
despite the soft Q2/14 dry bulk market due to their low operating
and G&A expenses.
Valuation
Based on our expected 2016 year-end balance sheet and fully delivered
fleet at that time, we calculate Star Bulk’s forward, normalized NAV to
be $22.51 per share. As such we believe that SBLK is undervalued and
we maintain our BUY rating and $22 price target. Our target is based on
the average of our two forward NAVs.

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