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.

Shipping Rates Drop as China Hydro Power Cuts Coal Need

By Bloomberg News Aug 1, 2014

Record production of hydropower from China’s Three Gorges and newer dams is displacing so much coal that rates to transport it have plunged to about record lows, roiling the shipping market.

Daily earnings for Panamaxes, vessels that are about 750 feet long and get most of their spot cargoes from hauling coal, slumped as much as 76 percent this year, getting to within $26 of an all-time low. China started hydroelectric plants this year with enough generation to replace 26 million tons of coal, or about 370 cargoes, data compiled by Bloomberg show. The extra power means less imports and weaker freight rates, Morgan Stanley estimates.

While global shipments of iron ore and grain are rising, China’s decreasing appetite for imported coal is a challenge to transporters already seeing weaker rates because of an oversupply of Panamaxes. The world’s second biggest economy’s efforts to curb air pollution will help cut imports of power-plant coal by 2.7 percent this year, according to Goldman Sachs Group Inc., following average increases of 29 percent annually from 2010 to 2013.

“Because of reduced buying of coal domestically, the price has fallen, therefore there’s less incentive to import,” Georgi Slavov, head of raw materials research at Marex Spectron Group, an energy and shipping derivatives brokerage in London, said by phone on July 23. “It’s having an impact already,”

Panamax Rates

Panamaxes are earning $4,859 today, according to data from the Baltic Exchange in London. Rates fell as low as $3,362 at the end of June. The all-time low was $3,336 in Sept. 2012.

The vessels will make an average of $12,900 this year, recover to a daily average of $17,250 next year, and rise to $17,900 in 2016, according to the median of analyst estimates compiled by Bloomberg.

China increased its hydroelectric capacity by 13 gigawatts in the first half, according to the China National Energy Administration. That’s the biggest first-half expansion since at least 2009 and more than enough to power Hong Kong.

China Three Gorges Corp., which built and operates the world’s largest hydropower project on the Yangtze river, completed two more dams this year which, as of July, had 20.3 gigawatts of power-generating capacity. One gigawatt translates into about 2 million tons of coal a year, according to a formula from Bloomberg Intelligence.

Replacing Coal

The largest of the two dams is the 286-meter-high (937 feet) Xiluodu project, a wall of concrete and steel spanning the Jinsha river on the border of Sichuan and Yunnan provinces in the country’s south. It’s is the second-biggest hydropower project in China, after Three Gorges. The other new dam is the Xiangjiaba, to the northeast on the Jinsha river.

“As concerns around pollution intensify, we believe this trend will lead to a gradual deceleration in coal-fired power generation,” Goldman Sachs said in a July 23 report. “A lower rate of demand growth from the power sector will result in a peaking in import volumes, followed by a decline.”

Growth in Chinese gross domestic product is forecast to slow to 7.4 percent this year from 7.7 percent in 2013, according to 62 economists surveyed by Bloomberg.

Other Cargoes

Seaborne imports of thermal coal in China will slide for the next four years, reaching 75 million metric tons by 2018, half the level of last year, Goldman Sachs said. Coal imports to India, Japan and South Korea will keep growing, it estimates.

The benchmark price for Chinese power-station coal was at 480 yuan to 490 yuan a ton, the lowest since December 2007, in the week ended July 27, data from the China Coal Transport and Distribution Association show.

The erosion of Chinese coal demand isn’t holding back global trade in the fuel, which will expand 5 percent in 2014, according to Clarkson Plc (CKN), the world’s largest shipbroker.

Global shipments of iron ore, the single-biggest cargo for dry-bulk vessels, will expand 10 percent to 1.3 billion metric tons a year, it estimates. Total trade in grains will rise 5 percent, according to the company’s most recent estimates.

Panamaxes are experiencing faster fleet growth than any other ship. Total capacity will rise 7 percent this year, two percentage points more than the trade in thermal coal, Clarkson predicts.

An Indonesian ban on exports of raw mineral ores has also exacerbated an oversupply of the vessels. The country, previously the world’s largest shipper of nickel ore and bauxite, banned exports in January. China was the largest buyer of the two ores from Indonesia before the ban, according to data from the International Trade Centre’s TradeMap, a venture between the World Trade Organization and United Nations.

The greatest growth in hydropower is in the south of China which is also where the largest amount of coal is imported, Diana Bacila, a coal analyst with Nena A/S, an Oslo-based adviser to utilities and energy traders, said by phone on July 24.

“Stronger hydropower production in South China is directly impacting imports,” she said. “It just cuts coal demand by replacing with hydropower generation.”

Oil tankers latest sinking business as U.S. imports less crude

 

 

.

The changing oil flows mean much of the U.S. oil tanker movement is restricted to shipments within domestic ports that are handled by smaller vessels.

Tim Rue/BloombergThe changing oil flows mean much of the U.S. oil tanker movement is restricted to shipments within domestic ports that are handled by smaller vessels.
  • The surge in United States domestic crude oil production has begun to send serious ripples through the global oil supply chain, with oil-tanker firm, Windsor Petroleum Transport Corp., filing for bankruptcy protection Monday, citing dramatic shifts in global oil trade flows as the cause

 

The Bermuda-based company, with more than US$100-million in debt, blamed “reduced growth in demand for seaborne transportation, particularly in North America,” as a key reason for its misfortunes in its petition filed in U.S. Bankruptcy Court in Wilmington, Del.

U.S. oil imports have shrunk to 7.5 million barrels per day this year, compared to 9.8 million bpd in 2008, as Canadian and domestic production from the Bakken and Eagle Ford basins displace about two million bpd of OPEC oil. Louisiana Offshore Oil Port LLC, the country’s biggest oil port, has seen barrels entering the port reach 685,000 bpd in 2013, roughly half of its peak imports in 2005.

Most analysts believe the U.S. is poised to surpass Saudi Arabia and Russia as the world’s biggest producer of oil.

Windsor, which operates four very large crude carriers (VLCC) and was caught off-guard as domestic blends displaced imports from international markets. Reacting to changing trade flows, OPEC producers have been refining oil domestically and shipping it to Asia, further reducing need for tankers, as oil products are usually shipped on other vessels.

The changing trade flows “led to a decrease in international tanker usage, as the voyage to the U.S. from the Middle East is one of the longest possible voyages for seaborne crude oil,” the company said in its filing.

VLCCs also rely on long-term contracts with major oil players, and BP PLC’s decision to cancel exclusive charters for some of Windsor’s tankers and not renew contracts set to expire in 2015, also hurt the company’s bottom line.

“There is a mismatch between the economics of the oil industry and the economics of the shipping industry,” said Ian Holloway, dean of Law at the University of Calgary and a naval historian. “Ships are big, expensive things, and take a long time to be built and travel. Lately, oil and gas has been dynamic and changing. We will see lots more of this, and even if we don’t see bankruptcies, there is an awful lot of unhappy shipowners right now.”

Frontline Ltd., the parent company of Windsor, is also facing problems.
One of the biggest oil tanker companies based out of Bermuda, and controlled by Norwegian billionaire John Fredriksen, Frontline posted a net loss of US$12.1-million in the first quarter, and warned the company will need to restructure if cash flows from operations do not satisfy liquidity requirements. New York-based Overseas Shipholding Group Inc. also filed for bankruptcy in late 2012, blaming adverse market conditions.

The changing oil flows mean much of the U.S. oil tanker movement is restricted to shipments within domestic ports that are handled by smaller vessels. In addition, the so-called Jones Act stipulates only U.S.-flagged carriers can ship within the domestic ports, hurting the prospects of foreign-registered ships.

There is a mismatch between the economics of the oil industry and the economics of the shipping industry

In the midst of the downturn, VLCCs that were ordered prior to the U.S. production boom continue to enter the market, further depressing spot rates. VLCCs earned an average of US$10,907 a day last year, the lowest in 16 years, and rates remain “subdued” this year, according to the International Energy Agency.

“The lesson from Windsor is that especially in markets evolving rapidly, your business model and your business structure is absolutely critical,” said Darryl Anderson, managing director at Wave Point Consulting, based in Victoria. “In this case, companies that were chartering Windsor only needed them on the margins. The company was not structured for long-term stability in cash flow, in a market with tight freight rates.”

Large oil-tanker outlook could improve in North America if new shipping routes are opened, analysts say. The United States is contemplating scrapping an export ban on crude oil exports, which could boost tanker demand, although VLCCs may be the last to benefit as the Panama Canal is not equipped to handle such large carriers yet.

TransCanada Corp.’s proposal to build the Energy East pipeline project that ends at a shipping terminal in Saint John, N.B. could also boost the shipping industry, Mr. Holloway said.

 

17 July 2014

Baltic Dry Index (BDI)    -17   738 
Rates

È

BCI

(Cape index)

BPI

(Panamax index)

BSI

(Supramax index)
INDEX

1248

-41

603

-18

660

-6

SPOT TC AVG (USD)

9422

-359

4825

-144

6906

-61

YESTERDAY (USD)

9781

4969

6967

YEAR AGO (USD)

13710

9265 9381

Even in Canada, booming U.S. oil and gas is elbowing out Alberta’s crude

The dramatic rise of U.S. crude oil and natural gas production is disrupting even long-established trade flows inside Canada, as Alberta producers are increasingly finding themselves competing for — and losing — market share to American petroleum suppliers, even in their home province.
The Bermuda-based company, with more than US$100-million in debt, blamed “reduced growth in demand for seaborne transportation, particularly in North America,” as a key reason for its misfortunes in its petition filed in U.S. Bankruptcy Court in Wilmington, Del.

U.S. oil imports have shrunk to 7.5 million barrels per day this year, compared to 9.8 million bpd in 2008, as Canadian and domestic production from the Bakken and Eagle Ford basins displace about two million bpd of OPEC oil. Louisiana Offshore Oil Port LLC, the country’s biggest oil port, has seen barrels entering the port reach 685,000 bpd in 2013, roughly half of its peak imports in 2005.

Most analysts believe the U.S. is poised to surpass Saudi Arabia and Russia as the world’s biggest producer of oil.

Windsor, which operates four very large crude carriers (VLCC) and was caught off-guard as domestic blends displaced imports from international markets. Reacting to changing trade flows, OPEC producers have been refining oil domestically and shipping it to Asia, further reducing need for tankers, as oil products are usually shipped on other vessels.

The changing trade flows “led to a decrease in international tanker usage, as the voyage to the U.S. from the Middle East is one of the longest possible voyages for seaborne crude oil,” the company said in its filing.

VLCCs also rely on long-term contracts with major oil players, and BP PLC’s decision to cancel exclusive charters for some of Windsor’s tankers and not renew contracts set to expire in 2015, also hurt the company’s bottom line.

“There is a mismatch between the economics of the oil industry and the economics of the shipping industry,” said Ian Holloway, dean of Law at the University of Calgary and a naval historian. “Ships are big, expensive things, and take a long time to be built and travel. Lately, oil and gas has been dynamic and changing. We will see lots more of this, and even if we don’t see bankruptcies, there is an awful lot of unhappy shipowners right now.”

Frontline Ltd., the parent company of Windsor, is also facing problems.
One of the biggest oil tanker companies based out of Bermuda, and controlled by Norwegian billionaire John Fredriksen, Frontline posted a net loss of US$12.1-million in the first quarter, and warned the company will need to restructure if cash flows from operations do not satisfy liquidity requirements. New York-based Overseas Shipholding Group Inc. also filed for bankruptcy in late 2012, blaming adverse market conditions.

The changing oil flows mean much of the U.S. oil tanker movement is restricted to shipments within domestic ports that are handled by smaller vessels. In addition, the so-called Jones Act stipulates only U.S.-flagged carriers can ship within the domestic ports, hurting the prospects of foreign-registered ships.

There is a mismatch between the economics of the oil industry and the economics of the shipping industry

In the midst of the downturn, VLCCs that were ordered prior to the U.S. production boom continue to enter the market, further depressing spot rates. VLCCs earned an average of US$10,907 a day last year, the lowest in 16 years, and rates remain “subdued” this year, according to the International Energy Agency.

“The lesson from Windsor is that especially in markets evolving rapidly, your business model and your business structure is absolutely critical,” said Darryl Anderson, managing director at Wave Point Consulting, based in Victoria. “In this case, companies that were chartering Windsor only needed them on the margins. The company was not structured for long-term stability in cash flow, in a market with tight freight rates.”

Large oil-tanker outlook could improve in North America if new shipping routes are opened, analysts say. The United States is contemplating scrapping an export ban on crude oil exports, which could boost tanker demand, although VLCCs may be the last to benefit as the Panama Canal is not equipped to handle such large carriers yet.

TransCanada Corp.’s proposal to build the Energy East pipeline project that ends at a shipping terminal in Saint John, N.B. could also boost the shipping industry, Mr. Holloway said.

Baltic Trade Index Decline – Sinks Shipping Sector Hopes

After a brief rally past 2000 the index has been on a steady decline to the 800 level.

Stock prices are still in the ” waiting for proof of life” stage .
11 July 2014

Baltic Dry Index (BDI)    -22   814 
Rates

BCI (Cape index) BPI (Panamax index) BSI (Supramax index)
INDEX 1465 -58 679 -23 679 -2
SPOT TC AVG (USD) 11149 -556 5432 -181 7099 -19
YESTERDAY (USD) 11705 5613 7118
YEAR AGO (USD) 14182 8725 9376

Spot  TC Average = The Average Value of the Main Shipping Routes applicable for each of the 3 types of Ships
BDI=The Weighted Composite Index of BCI/BPI/BSI

VLCCF has moved down sharply in the past week;

KNIGHTSBRIDGE TANKERS LTD(VLCCF:NASDAQ, US)

12.72USDDecrease0.12(-0.93%)Volume: 
Below Average
As of 11 Jul 2014 at 10:31 AM EDT.

QUOTE DETAILS

Open 12.81 P/E Ratio (TTM) 26.2x
Last Bid/Size 12.72 / 2 EPS (TTM) 0.49
Last Ask/Size 12.75 / 2 Next Earnings 13 Aug 2014
Previous Close 12.84 Beta 0.90
Volume 37,971 Quarterly Dividend 0.2000
Average Volume 562,298 Dividend Yield 6.29%
Day High 12.90 Ex-Dividend Date 20 May 2014
Day Low 12.64 Shares Outstanding 30.5M
52 Week High 16.32 # of Floating Shares 11.83527M
52 Week Low 7.00 Short Interest as % of Float 14.94%
DRIP Eligible No

Dryships, often taken as a bellweather of the sector recovery  has retreated from $3.50 level

DRYSHIPS INC(DRYS:NASDAQ, US)

3.00USDDecrease0.007(-0.23%)Volume: 
Above Average
As of 11 Jul 2014 at 10:32 AM EDT.

QUOTE DETAILS

Open 3.01 P/E Ratio (TTM)
Last Bid/Size 3.00 / 93 EPS (TTM) -0.36
Last Ask/Size 3.01 / 133 Next Earnings
Previous Close 3.01 Beta 2.44
Volume 1,277,430 Last Dividend
Average Volume 4,102,948 Dividend Yield 0.00%
Day High 3.05 Ex-Dividend Date
Day Low 2.98 Shares Outstanding 454.9M
52 Week High 5.00 # of Floating Shares 440.086M
52 Week Low 1.80 Short Interest as % of Float 2.18%
DRIP Eligible No
chart
Diana Shipping is generally regarded as better managed and financially stable but it too has retreated

DIANA SHIPPING INC(DSX:NYSE, US)

10.16USDDecrease0.0398(-0.39%)Volume: 
Below Average
As of 11 Jul 2014 at 10:33 AM EDT.


QUOTE DETAILS

Open 10.23 P/E Ratio (TTM)
Last Bid/Size 10.16 / 1 EPS (TTM) -0.27
Last Ask/Size 10.18 / 3 Next Earnings 30 Jul 2014
Previous Close 10.20 Beta 1.38
Volume 39,854 Last Dividend
Average Volume 474,665 Dividend Yield 0.00%
Day High 10.23 Ex-Dividend Date
Day Low 10.15 Shares Outstanding 83.4M
52 Week High 13.93 # of Floating Shares 68.11239M
52 Week Low 9.65 Short Interest as % of Float 2.29%
DRIP Eligible No

Shipping Sector – Still Struggling to The Light At The End Of The Dock

Navios Maritime Acquisition Corp.

NNA : NYSE : US$3.58
HOLD 
Target: US$3.75
Energy — Maritime
SHIFTING GEARS
Investment recommendation
Initiating coverage with a HOLD rating and $3.75 price target

Investment highlights

 Strong brand and long-term relationships creates market
opportunity: As part of the Navios group of companies, management
maintains significant relationships throughout the industry,
particularly with banks, that allow it to see distressed deals earlier
than many of its competitors. Furthermore, the company has
proven access to multiple forms of capital and has demonstrated an
ability to think creatively and move quickly to seize opportunities.
 Focus on growing attractive VLCC segment: Recently, NNA has
focused its capital on growing in the VLCC segment, particularly
secondhand vessels. We believe this is an attractive strategy, as we
think that 5-10 year old secondhand VLCCs are currently one of the
most undervalued segments of the tanker market.

 Capital structure and employment strategy supports dividend: NNA
maintains a relatively long-term capital structure through a mixture
of term loans and senior notes, which, combined with high period
charter coverage, help support a healthy dividend of 5.6% per year.
Upside exposure to the market is primarily through profit sharing
arrangements. We believe this is a more conservative approach to
the segment.

Valuation
Our forward, normalized NAV (2016E) is $3.43 per share, not including $0.60 of dividends expected over that time frame. As such, we believe the stock is fairly valued at current levels and initiate coverage with a HOLD rating and $3.75 price target.
We use a 1.1 multiple to value the stock due to an above average, sustainable dividend, and relatively low cost structure

09 July 2014

Shipping Index Remains Under Pressure
Baltic Dry Index (BDI)    -18   863 
Rates

È

BCI

(Cape index)

BPI

(Panamax index)

BSI

(Supramax index)
INDEX

1648

-107

710

+6

684

-3

SPOT TC AVG (USD)

12524

-627

5677

+42

7150

-35

YESTERDAY (USD)

13151

5635

7185

YEAR AGO (USD)

13963

8139 9449

 

Crashing Iron Ore May Lift Dryships

from Motley Fool

DryShips (NASDAQ: DRYS ) has been beating on this drum for months: Iron ore prices have been in a tailspin and the domino effect looks bullish for the dry shipping industry. On June 13, Morgan Stanley came out with a report that echoed exactly what George Economou, CEO of DryShips, has been saying all along.

Look out below!
In the report, Morgan Stanley dropped its estimate for iron ore prices to average $105 a ton this year compared to previous forecasts of $118 back in May and $135 last year. For 2015, even worse, as two analysts expect a further decline to an average of $90 per ton. That sounds like more than a temporary blip.

DryShips executives have been emphatic in various interviews, conference calls, and press releases saying that miners have been ramping up their production and it is going to crash iron ore prices. DryShips likewise believes the pressure on iron ore prices will continue for years to come.

Ordering up some ore
The DryShips theory is that cheap and plentiful iron ore orders would begin to accelerate in pace and then be shipped on the high seas to be delivered around the world, especially to China, which would desperately need the cheap iron ore. Much of China’s own domestic mines would be forced to close due to such cheap market prices. This in turn would spark more iron ore shipping demand, higher shipping rates, and greater shipping profits.

The two Morgan Stanley analysts wrote, “As seaborne supply enters a period of vast expansion, cheaper tons will displace higher cost tons in China and elsewhere.” That’s what DryShips’ Economou has been predicting. He’s been a bit off on timing, but maybe he’ll be redeemed shortly.

Of course, the year is half over, so $105 per ton “average” means $95 for the second half of the year, according to Morgan Stanley. The firm reiterated what DryShips has been saying — many Chinese mines simply have operating costs higher than these estimated low prices. It’s simply not worth spending $100 to extract $95 (or less) worth of product. It is cheaper to simply import ore.

So why are rates still depressed?
Expect to see shipping demand and rates pick up gradually over the next several weeks or months. Andrew Shaw, an analyst with Credit Suisse, pointed out that it will take some time for these high-cost Chinese mines to close unless the iron ore prices suddenly undershoot estimates and force faster closures.

DryShips executives have mentioned that most Capesize ships, the ships that carry iron ore, are already locked up in contracts. The remaining available ships for hire on the spot rate are in limited global supply. Once this supply is absorbed, which shouldn’t take long by DryShips’ reasoning, then the pendulum will swing upward in the other direction. For now, the pool of Capesize ships is in a state of “marginal oversupply.” Even a small change where demand outweighs the rest of supply, could mean that rates may run multitudes from current levels as we have seen sometimes in years past including late 2013.

Foolish takeaway
The rapidly changing dynamics of the dry shipping market are exciting to watch. Changes can come seemingly out of left field. Investors should check out the daily rates and read the news on global iron ore supplies while watching this play out. If things work out as DryShips hopes, it could be a rags-to-riches story for the company, and a boon for industry in general.

Shipping Sector : The Recovery That Never Arrived

ultramax_dry_bulk_top.jpgAs we approach midyear 2014, shipping’s economics remain stuck in the doldrums will little or no recovery in sight. The surplus capacity of ships to the cargoes requiring transportation has been aggravated by the delivery of a massive orderbook of new ships that followed the boom markets of the middle of the last decade.

This surplus is not limited to a few markets but, with the possible exception of gas, both LNG and LPG, it has affected the rest and in particular the wet and dry bulk, and the container markets. The effect has been severe as few ships in these markets generate a profit after operating expenses, debt interest and amortization.

Numerous public companies have gone bankrupt as also have many private ones. The German KG funds have been almost completely wiped out and created huge losses for the German shipping banks. The average age of the world fleet is at an historic low, meaning it will be around for at least another decade. Unfortunately when companies go bankrupt or when their ships get arrested and sold, they do not go away but continue to trade with lower capital costs, thereby prolonging the depressed freight markets.

Furthermore a majority of the fleets in most sectors trade in the spot markets without any period charter cover, in the false expectation that markets will recover or secondhand values will increase.

This however ignores the facts that shipyard capacity remains high and in countries like Korea and China has now become a strategic industry supported with domestic banks funding the construction period and government funds backing Export Credit. All without any secure operating income from charters.

Unfortunately this rush to order new ships has been fueled by an influx of new money, both equity and bonds from Private Equity and Hedge Funds that are gambling on ship values and not the long-term revenue streams from operations.

The vast majority of the ships on order today have no contractual employment and no evidential income other than indications of future ship values referenced back to the boom years of 10 years ago.

Some have likened this influx of new money to the “Blind Capital” of the mid-1800s. “Credulous capital, ignoring risks, flooding into unwise investments”.

There is no sign of any investment interest from Mutual Funds or Institutional Investors such as Pension Funds or Life Insurance companies which are usually averse to short term gambles. The speculative day traders have fun playing the rumors and the price volatility of the publicly traded companies.

Even more surprising is the activity of some of the Private Equity funds buying distressed bank debt at marginal discounts. If a shipowner cannot serve his existing bank debt, how is he going to service the new owners of the debt who have much higher expectations of return on their investments than simple bank margins?

It has been said that some of these funds are looking for default so they can convert the loans to equity, take over the ships and sell them for a profit. The track record of these deals so far is not good and the current focus on newbuildings only extends the excess fleet capacity and prolongs the lower freight rates which are the key economic of the shipping industry.

The list of publicly traded shipping companies on the New York stock exchanges is the worst performing of any sector. Original equity has been emasculated by secondary offerings and huge secured debts that in many cases today exceed the current market value of the ships that are the security. In the past 12 months we have seen the emergence of new forms of “Junk Bonds”, with double digit interest rates, which rapidly escalate on default and look more like the Cash Advance lending that proliferates among the poor. This junk is surprisingly not shown as debt in the borrower’s balance sheets and is ironically named as “Perpetual”.
So while new money is finding the shipping industry what is the outlook for the services it provides?

The freight markets for most ship types remain severely depressed because of the excess capacity that was generated from the new-building orders that followed the brief boom of 10 years ago, and then faced the financial crises and the global recession that still envelops the world today.

Yet it is reported that some $40bn of newbuilding orders were placed in the first 4 months of 2014.

This current reckless activity in ordering hundreds of new ships will only extend further the bad markets and push any balancing between supply and demand into the next decade, at the earliest. The claims of fuel economies of the new ships will not force earlier scrapping as the older ships will have less capital invested in them and can be maintained to operate until they are at least 20 years old.

There is no evidence of any increased demand for shipping, except in the gas sectors, and the newfound resources of oil and gas in the USA will have a negative effect on crude oil shipments. This may well be compounded by the new pipelines between Russia and China, the reduction in consumption of gasoline in China and the expansion of “Fracking” in Europe. The USA will reduce its imports of crude oil by at least 50% in the next 10 years and convert its trucking fleets to natural gas by 2025.

It unfortunately will take several years before the current influx of new money faces the reality that it is operating income that makes a business and not the fluctuating values of the operating assets.
Source: First International Corporation

Ship owners invest $18.4 billion during April for newbuildings and second hand vessels

shipbuilding_frontview_shipyard_top.jpgShip owners around the world have kept on piling up newbuilding orders as demand for modern tonnage has remained unabated during the month of April. According to data compiled by shipbroker Golden Destiny, a total of $16 billion was invested in newbuilding orders during April, with an additional $2.4 billion headed for second hand tonnage. Newbuilding orders were up by 7% on the month and up by 53% on the year. A total of 318 vessels were contracted, while 181 new orders were reported at an undisclosed price. In terms of second hand vessel pruchases, Golden Destiny reported a decline of 54% on a monthly basis and a fall of 30%, compared to the same month of last year. A total of 93 vessels were traded.

According to the shipbroker’s analysis, “April ended with unexpected downward pressure in the performance of dry freight market as oversupply of vessels seems to head downwards the freight market recovery. World economy in a recovery mode with fears of slowdown from the weaker performance of Chinese economy that also shadows the freight performance of dry bulkers. Chinese economic growth slowed down to 7.4% during the first quarter of the year, but its iron ore appetite stays solid and is expected to bring future firmness in Baltic Dry Index that now tries to stay afloat above the psychological barrier of 1,000 points. A downward pressure is also witnessed in the performance of crude freight rates, while the container market tries to benefit from the gradual recovery of developed Eurozone to resolve the key issue of “oversupply”. The significant upturn of dry and wet freight market, during the first quarter of the year, resulted also in a continued upward momentum of shipping investments that now has started to slow, but asset prices have not yet followed the downward incline of freight market. Investors seem that wait to see the performance of freight market and development of asset prices in the coming days in order to renew their investment strategy”, said Golden Destiny.

It added that “2014” signals to be one more challenging year with threats and investment opportunities as asset prices remain significantly at lower levels compared with their 10 years average prices. Vessels oversupply is very likely to be rebalanced with demand growth this year for the first time since the first downturn in 2009, but it is too early to confirm this trend as newbuilding appetite keeps high and refuels the existence of imbalance between vessels’ supply growth and demand”.

The shipbroker also noted that “overall, S&P activity in the secondhand market for April 2014 ended on lower levels than last month and even last year. Scrapping activity is also showing slower volume and newbuilding appetite persists on the high side. Despite the downward incline of secondhand purchasing appetite in April, shipping players keep much higher levels of activity from last year. During January-April 2014, the average number of weekly reported S&P transactions is 35 vessels, up by 40% year-on-year compared with 25 vessel purchases in the first four months of 2013 and up by 67% from 2012 levels (21 vessel purchases).
Compared with the investments in the secondhand market, in terms of number of vessels, the ordering appetite for the construction of new vessels is 97% higher than the number of vessels purchased by shipping players worldwide. During the first four months of 2014, the average number of weekly reported new orders was 69, up by 86% year-on-year (37 new orders on average reported per week in January-April 2013) and up by 165% from 2012 levels. (26
new orders on average reported per week in January-April 2012)”, said Golden Destiny.

DEMOLITION MARKET
“In the demolition market, the scrapping appetite of shipping players shows almost similar levels of last year with a soft downward incline from 2013 and 2012 levels. Record scrapping appetite in the container segment supports strong ship recycling business for the shipyard in India that offered very alluring levels of disposal rising to excess $500/ldt.
During January-April 2014, the average number of weekly reported demolitions represents 16% year-on-year decline with 16 vessels reported on average per week in 2014 compared with 19 vessels disposals per week in 2013 and 20 vessel disposals in 2012″, the shipbroker concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide

 

U.S. Ruling Loosens Four-Decade Ban On Oil Exports- Tanker Stocks May Benefit

Shipments of Unrefined American Oil Could Begin As Early As AugustJune 24, 2014 5:14 p.m. ET Wall Street Journal
The Obama administration has quietly cleared the way for the first exports of unrefined American oil in four decades, allowing energy companies to chip away at the long-standing ban on selling U.S. crude overseas.

Federal officials have told two energy companies that they can legally export a kind of ultra-light oil that has become plentiful as drillers tap shale formations across the U.S. With relatively minimal processing, oil shipments could begin as early as August, according to one industry executive involved in the matter.

Using a process known as a private ruling, the U.S. Commerce Dept.’s Bureau of Industry and Security is allowing Pioneer Natural Resources Co. of Irving, Texas, and Enterprise Products Partners LP of Houston to export ultra-light oil known as condensate to foreign buyers who could turn it into gasoline, jet fuel and diesel.

Both companies confirmed they had received the rulings.

Under current rules, companies can export refined fuel, such as gasoline and diesel, but not oil itself. The Administration’s new approach, which hasn’t been publicly announced, redefines some ultra-light oil as fuel after it has been minimally processed, making it eligible for sale abroad.

The Commerce Department said the companies have improved the processing of the crude in a way that qualifies it for export, even though the oil wouldn’t count as being traditionally refined. Exactly how the agency defines condensate and remains unclear.

The first shipments are likely to be small, but could ultimately encompass a lot of the 3 million barrels a day of oil that energy companies are pumping from shale, industry experts say, depending on how regulators define what qualifies for export

Tankers to benefit from more energy exports, Jefferies says • 11:59 AM

  • While refiner stocks are tumbling on fear that margins will be hurt as the U.S. begins to allow U.S. condensate exports, the sensational headline speculating on the end of the oil export ban “is a long way from giving two companies export permissions to full U.S. crude exports.”
  • However, Jefferies analysts say the news is a near-term positive for tanker companies that ship oil, such as Frontline (FRO -4.6%) and Nordic American Tanker (NAT +1.3%).
  • Even while condensate export volumes are likely to be limited, any increase in export volumes should have a net positive impact on the crude oil tanker market, the firm says, with any heavy condensate volumes exported out of the U.S. to be carried out on either Aframax crude oil tankers and/or Panamax crude oil tankers.

TEEKAY TANKERS LTD(TNK:NYSE, US)

4.20USDDecrease0.03(-0.71%)Volume: 
Average
As of 25 Jun 2014 at 10:59 AM EDT.

QUOTE DETAILS

Open 4.18 P/E Ratio (TTM) 17.6x
Last Bid/Size 4.19 / 24 EPS (TTM) 0.24
Last Ask/Size 4.20 / 1 Next Earnings 4 Aug 2014
Previous Close 4.23 Beta 2.10
Volume 184,389 Quarterly Dividend 0.0300
Average Volume 782,689 Dividend Yield 2.86%
Day High 4.29 Ex-Dividend Date 15 Apr 2014
Day Low 4.18 Shares Outstanding 83.7M
52 Week High 5.08 # of Floating Shares 62.75428M
52 Week Low 2.49 Short Interest as % of Float 13.74%
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KNIGHTSBRIDGE TANKERS LTD(VLCCF:NASDAQ, US)

BuySell
14.69USDIncrease0.12(0.82%)Volume: 
Average
As of 25 Jun 2014 at 11:00 AM EDT.

 

QUOTE DETAILS

Open 14.53 P/E Ratio (TTM) 29.8x
Last Bid/Size 14.68 / 4 EPS (TTM) 0.49
Last Ask/Size 14.69 / 8 Next Earnings 13 Aug 2014
Previous Close 14.57 Beta 0.95
Volume 120,159 Quarterly Dividend 0.2000
Average Volume 431,246 Dividend Yield 5.45%
Day High 14.87 Ex-Dividend Date 20 May 2014
Day Low 14.50 Shares Outstanding 30.5M
52 Week High 16.32 # of Floating Shares 11.83527M
52 Week Low 6.50 Short Interest as % of Float 14.67%
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