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Why the overall industry outlook is mismatching Frontline
The company has seen the improved tanker market in the third quarter. This could continue into and passed the winter market. However, the company is still facing a challenging debt situation.
Industry analysts suggest that investors should avoid Frontline because of the bankruptcy risk. Currently, the company is facing bankruptcy. This is led by the $190 million bond that’s due in April 2015.
The cash breakeven costs are the daily rates of Frontline’s (or FRO) vessels. They have to earn the rates to cover budgeted operating costs and dry dock, estimated interest expense, payable at hire, and corporate overhead costs.
As of June 30, 2014, Frontline’s (or FRO) cash decreased by $49 million. Newbuilding installments of $41.5 million were paid in the quarter. Restricted cash in ITCL decreased by $38 million.
FRO’s management commented that higher vessel scrapping supports the orderbook. However, the second quarter witnessed a fairly balanced fleet development.
Ship operating expenses during the quarter declined to $23.1 million—from $32.8 million in the same quarter last year. Voyage expenses and commission dropped to $72.1 million from $74.2 million.
During the second quarter, Frontline’s (or FRO) total operating revenue fell to $118.9 million—from $121.2 million in the same quarter last year—due to a dip in time charter rates and a smaller fleet portfolio.
After the first quarter’s poor performance, Frontline Ltd. (or FRO) reported even lower revenues and net loss for the second quarter earnings. It released the second quarter earnings on August 28, 2014.
Two main drivers suggest investments in renewable energies, nuclear power, and natural gas can be expected to take on greater importance for China.
Analysts expect Port Hedland export volumes to stay consistently high. Given the accompanying ramp-up in Brazilian iron ore exports, the Capesize market should be firmer in the latter part of 2014.
Shipments from Port Hedland represented 55% of Australia’s iron ore exports last year. More than 80% of this cargo goes to China.
China’s steel production mills are reluctant to reduce output for fear credit could be cut off and market share captured by rival producers.
When import levels of iron ore and coal imports are up in China, demand is high and shipping rates rise.
The stimulus measures introduced by China follow a string of weak economic data released in August. With higher credit available, China’s big banks are expected to channel funds into areas of economic importance.
Dry bulk shipping demand is closely tied to China’s growth. The PMI data confirmed reports of subdued client demand for new orders.
New build prices offer a better sense of future rates. Potential sellers are hopeful the freight market will rebound in the fourth quarter as predicted by many analysts.
When they expect demand to outpace supply, managers return to the shipyard to place new orders with the belief that the new vessels will generate a profit.
The BDI is rising on the back of greater iron ore shipping and rising demand from the Asian economies—China’s in particular.
The Guggenheim Shipping ETF (SEA) is an index weighted with dry bulk shipping companies. China is key to the current high yields in this industry.
Five-year very large crude carrier (or VLCC) prices remained consistent at $75 million—last month’s levels. On year-over-year (or YoY) basis, prices increased by 36%. Besides, ten-year VLCC prices stood unchanged at $48 million. They increased by 41.2% YoY.