Frontline Goes to Last In Line as Shipping Demand Drops

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Frontline Ltd, the world's largest operator of supertankers, posted its first quarterly loss in seven years. A global slump in oil demand was the cause and Frontline said it was going to speed up eliminating it's older single-hull carriers from its fleet by Dec-2010.

Frontline (FRO) lost 7-cents per share of $5.6 million for the quarter. This compared to $107.8 million profit in Q3 of 2008 after global demand for crude pushed tanker rates to an all time high. The 7-cent loss was nearly twice the 4-cent loss analysts expected.

Frontline also said they might cut their exposure to new vessels under construction by $198 million. They have already cut their exposure by $36 million and have an option to cancel two more ships. I wrote about this problem a week ago in an market commentary. There is an extreme number of new ships of all types being constructed around the globe. Nearly 1,000 new dry bulk ships are expected to enter service over the next 24 months. This will push rates down sharply if all the ships on order are actually constructed. Nearly every shipper is faced with the problem of canceling orders and paying a penalty or taking delivery and being faced with lower fees and higher competition for loads. I don't have numbers for the tankers under construction but after last years peak in rates I would bet there were quite a few. At one point rates were $125,000 per day in 2008 and in 2009 they fell to a low of around $25,000 per day. Quite a difference when you are planning your shipping budget.

Frontline said their very large crude carriers or VLCCs earned an average of $32,100 per day in Q3 and the smaller 1 million barrel Suezmax made $15,900 a day. They need $32.900 and $27,100 per day to break even.

Frontline said it would phase out all single hull supertankers by the end of next year. International Maritime Organization rules will impose trading restrictions on single-hill carriers next year. This is in response to several accidents where hulls were breached and major oil spills were the result. Frontline expects rates to go higher because the new rules will force the scrapping of about 12% of the current global tanker fleet. Frontline expects to return to profitability in Q4.

Other tanker companies, Overseas Shipholding Group Inc, (OSG) and Antwerp based Euronav also reported losses for Q3. To offset the lower rates tankers are sailing at 12-12.5 knots compared to their normal 13.5-14 knots. The drop in speed conserves fuel and adds extra time between ports. With rates paid by the day a slow boat makes more money.

OPEC shipped an average of 28.5 million barrels per day in Q3. That was 12% below Q3-2008 but the tanker fleet was 8.7% larger in Q3 than in Q3-2008. The IEA said global demand in Q2 was 85.1 mbpd but would climb back to 86.2 mbpd in Q1-2010. Because of the lower volumes and higher tanker capacity the Baltic Dirty Tanker Index averaged 505 for Q3. That is the lowest level since Q4-2001. The BDTI is an overall measure of shipping costs for crude.