Bloomberg News

Chemicals Seen Boosting Odfjell as Demand Swamps Fleet: Freight

December 01, 2011

Nov. 29 (Bloomberg) -- Vessels hauling chemicals used to make everything from paint to plastics may earn the most in four years in 2012 as volumes exceed fleet capacity, boosting profit for tanker owners Stolt-Nielsen Ltd. and Odfjell SE.

Demand will gain 5 percent next year, more than twice the 2.3 percent expansion in the number of carriers, according to the median estimates in a Bloomberg survey of eight analysts. Rates will rise 10 percent in 2012 and 15 percent in 2013, says investment bank SEB Enskilda. Shares of Odfjell will almost double and those of Stolt-Nielsen will climb 48 percent within 12 months, according to the mean of as many as six analyst predictions compiled by Bloomberg.

While vessels hauling crude and coal lost money for owners this year and rates for cargo boxes tumbled 64 percent since January, Odfjell and London-based Stolt-Nielsen will report profit for at least the next two years, the analyst estimates show. The fleet of the largest oil tankers is the biggest in three decades and the number of capesizes hauling dry-bulk commodities reached a record. The carrying capacity of chemical tankers declined 21 percent this year, the United Nations says.

“The market is a lot tighter than people think,” said Erik Folkeson Jensen, an analyst at First Securities ASA in Oslo whose recommendations on the shares of shipping companies returned 8.5 percent in the past three months. “We will have an improvement next year and a bigger one in 2013.”

Trade Route

Rates on the benchmark Houston-to-Asia trade route rose 65 percent to an average $101.67 a metric ton since June, the biggest rally since April 2009, according to data from London- based shipbroker Clarkson Plc. The cost of hauling chemicals such as styrene and benzene, used to make paint, plastics, soaps and rubber, averaged $63.62 a ton in 2011 across 15 routes, the highest level since 2008, the data show.

U.S. exports of the 20 largest chemicals made from oil and natural gas rose 4.7 percent in the first nine months of this year, the most recent data show.

Demand is strengthening in part because of this year’s 22 percent plunge in U.S. natural-gas prices, which lowers costs for chemical companies and increases their competitiveness against Asian producers who rely on naphtha derived from crude, according to Ole Stenhagen, an Oslo-based analyst at SEB Enskilda. Oil advanced 7.5 percent in New York since the start of January.

Sulfuric Acid

Chinese purchases of eight chemical cargoes including styrene, sulfuric acid and glycol were more than 20 percent higher in September than a year earlier, according to First Securities. The Asian nation is the largest buyer of oil- and gas-based chemicals, importing 26.4 million tons last year, according to Drewry Maritime Research. The U.S. and Saudi Arabia are the top two exporters, the London-based group says.

The jump in trade from the U.S. to Asia is spurring owners to divert vessels in the Atlantic Ocean to compete for business, potentially curbing the rally in rates, said Rohit Pattnaik, an analyst for Drewry in Gurgaon, India.

Volumes from the U.S. are being driven by producers seeking to cut inventories before the end of the year, reducing taxes paid on stockpiles, according to RS Platou Markets AS, the investment-banking unit of Norway’s largest shipbroker. That may mean shipments decline at the start of 2012.

IMF Estimate

Strengthening demand for chemicals depends on economic expansion. Chinese growth will slow to 9 percent next year from 9.5 percent in 2011, the International Monetary Fund predicts. The Washington-based group also anticipates weaker expansion in the euro region, India, Latin America and the Middle East. The IMF in September cut its 2012 growth forecast for the global economy to 4 percent from 4.5 percent.

Chinese growth will help chemical producers even as they pay higher freight costs. Midland, Michigan-based Dow Chemical Co., the largest U.S. chemical maker, will report a 34 percent jump in earnings before interest, taxes, depreciation and amortization to $8.17 billion for 2011, according to the mean of 14 analyst estimates compiled by Bloomberg.

Natural gas traded in New York declined this year as production from shale fields in the U.S. expands more quickly than demand. Output will gain 6.1 percent this year, against 1.7 percent for demand, according to the Energy Department.

Stolt-Nielsen will report a 4.4 percent increase in net income to $110.75 million this year, the most since 2008, according to the mean of eight analyst estimates compiled by Bloomberg. Profit will reach $125.8 million in 2012 and $179 million in the following year, estimates show.

‘Buy’ Advice

While the shares fell 29 percent to 101 kroner in Oslo trading this year, nine of 10 analysts covering the company tracked by Bloomberg recommend buying the stock, anticipating on average that it will reach 149.60 kroner within 12 months.

Odfjell, based in Bergen, Norway, will report record net income of $240.4 million this year, including a one-time gain of $270 million, the mean of seven estimates shows. Profit will be $21.1 million next year and almost $64 million in 2013, according to analysts’ projections.

The shares fell 44 percent to 30.4 kroner in Oslo this year and will reach 58.82 kroner in 12 months, according to the mean prediction of analysts tracked by Bloomberg. Nine of 10 analysts rate the stock a “buy.”

Frontline Ltd., the biggest operator of the largest crude tankers, will report a loss for 2011, the mean of as many as 19 analyst estimates shows. The Hamilton, Bermuda-based company said Nov. 22 it may run out of cash early in 2012 and is seeking talks with lenders. The shares fell 89 percent this year.

43% Drop

A measure of the combined earnings of the 14-company Bloomberg Pure Play Dry Bulk Shipping Index will decline 43 percent this year, according to data compiled by Bloomberg. The gauge tumbled 44 percent this year.

Rates for very large crude carriers fell 9.4 percent this year, according to Clarkson. Hire costs for capesizes averaged $14,420, below the $20,000 they need to break even, according to data from the London-based Baltic Exchange, which publishes freight rates along more than 50 maritime routes.

Earnings for chemical tankers are difficult to compile because the vessels carry about 600 different kinds of cargo, according to Odfjell. As much as 40 percent of the fleet can also be deployed to haul oil products, said Folkeson Jensen of First Securities.

“Right now chemical-tanker equities with favorable prospects are unjustifiably lumped in with struggling tanker companies,” said Stenhagen of SEB Enskilda. “The outlook for 2012 and 2013 is very good, and both Stolt-Nielsen and Odfjell have the strength and leverage to benefit.”

--Editors: Stuart Wallace, Dan Weeks.

To contact the reporters on this story: Isaac Arnsdorf in London at iarnsdorf@bloomberg.net; Alaric Nightingale in London at anightingal1@bloomberg.net

To contact the editor responsible for this story: Stuart Wallace at swallace6@bloomberg.net


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