In a precursor of troubled waters ahead for the shipping industry, Frontline Ltd, the world’s largest operator of supertankers, recently cancelled orders for two supertankers and four supermaxes, a total value of $556 million. The chairman of Frontline, Jens Martin Jensen, predicted that moves by other shippers will “emerge in the next weeks” that could result in as much as one-third of all orders for new oil tankers being cancelled or delayed due to the slacking global thirst for crude. The stock price of Frontline Ltd (NYSE: FRO) has fallen from a high of $72.36 in the past year to $24.32.
While the price of oil has more than doubled since February 2009, it has largely been the work of speculators and investors fleeing the weak dollar for commodities. The global demand for crude has actually declined from the economic downturn, crippling the tanker industry. The International Energy Agency expects the first drop in overall oil demand in consecutive years since 1983. In the past year, the share price of USO, (NYSE: USO) the exchange traded fund for petroleum, has fallen from $119.17 to $37.41.
Orders at shipyards worldwide have collapsed: a 42.3% fall in the last year alone. Ye Zhigang, an analyst with Haitong Securities, predicts that the global demand for shipping will remain low until 2013. He expects large government owned shipyards to endure with many of the smaller private ones being forced into bankruptcy or gobbled up by a stronger competitor.
As a result of the slack in demand, the rental price for a supertanker, based on shipping rates from Saudi Arabia to Japan, is now so low that many are being used for storage. There are now about 60 supertankers only holding oil, a one-third increase since April of this year. The benchmark rental rate for supertankers in the first quarter of 2009 was at its lowest rate since the third quarter of 2002. The Claymore Delta Global Shipping Index, (NYSE: SEA) the exchange traded fund for the shipping industry, is at $11.46, down from a year high of $26.05.