Bloomberg News

Billionaires Buy Gasoline Ships as Fuel Cargoes Expand: Freight

March 05, 2012

While demand for seaborne gasoline, diesel and other products is expanding to a record, it still won’t be enough to eliminate the glut of ships. Photographer: Tim Rue/Bloomberg

While demand for seaborne gasoline, diesel and other products is expanding to a record, it still won’t be enough to eliminate the glut of ships. Photographer: Tim Rue/Bloomberg

The richest investors in shipping are buying gasoline tankers, anticipating that fuel demand will expand faster than the fleet for the first time in nine years.

Global shipments will jump 4.3 percent in 2012 as vessel capacity gains 3.7 percent, according to London-based Clarkson Plc (CKN), the world’s largest shipbroker. Daily rates for Medium- Range tankers, each hauling enough fuel to fill about 780,000 cars, will rise 19 percent to an average of $14,844 this year, the median of 10 analyst estimates compiled by Bloomberg shows. That’s more than the $10,999 anticipated in forward freight agreements, traded by brokers and used to bet on future rates.

John Fredriksen, whose publicly traded assets are valued at $9.27 billion, ordered as many as 10 of the tankers last month. Wilbur Ross, whose company manages about $10 billion of assets, was part of a group buying 30 vessels in September. Global refineries are shifting to India and China from Europe and the U.S., increasing delivery distances and tying up vessels for longer, effectively boosting demand for shipping.

“This is smart money that has historically done well investing at the right time of the cycle,” said Jonathan Chappell, an analyst at Evercore Partners Inc. in New York whose recommendations on the shares of shipping companies returned 9.8 percent in the past three months. “Those purchases by Ross and John Fredriksen confirm that the fundamentals appear most attractive for product tankers.”

Crude Carriers

MR tanker rates averaged $12,500 last year, 29 percent more than in 2010, according to Credit Suisse Group AG.

That’s different from most of the rest of the shipping industry. Earnings for very large crude carriers, about eight times bigger than MRs, averaged $22,137 in 2011, down from $42,616 in 2010, Clarkson data show. Capesizes, the biggest coal carriers, got an average of $15,639, compared with $33,298 a year earlier, according to the London-based Baltic Exchange, which publishes costs along more than 50 maritime routes.

Fredriksen, 67, ordered six MR tankers valued at $210 million last month from Changwon, South Korea-based STX Offshore & Shipbuilding Co. and took an option for four more. Ross invested about $300 million in Diamond S Shipping of Greenwich, Connecticut, which bought vessels from Cido Tanker Holding Co. It was the 74-year-old’s first investment in shipping.

U.S. seaborne imports of refined products will rise about 9 percent to 2 million barrels a day this year, helping to compensate for projected declines across Europe, led by a 5 percent drop in Germany, according to Clarkson. China will become a net exporter by 2015 and India, which already sells more than it buys, will be refining 70 percent more oil products by 2016, the shipbroker estimates.

Seaborne Gasoline

The U.S. exported 60,385 barrels a day more refined products than it imported in 2011, the first net sales since at least 2001, Energy Department data show. Five years earlier, net imports averaged 2.3 million barrels a day.

While demand for seaborne gasoline, diesel and other products is expanding to a record, it still won’t be enough to eliminate the glut of ships. Cargoes of refined products that will reach 99.9 million deadweight tons will be met with vessel supply of 114.2 million, Clarkson’s forecasts show. Deadweight tonnage is a measure of carrying capacity, and the estimates include all types of product tankers.

Shipping companies will still lose money. Scorpio (STNG) Tankers Inc., the owner of 12 products vessels, will narrow its net loss to $13.6 million this year from $82.7 million in 2011, the mean of four analyst estimates compiled by Bloomberg shows.

Torm A/S (TORM), the largest publicly traded owner of the vessels, will report a loss of $166 million, down from $453 million, seven predictions show. Shares of the Hellerup, Denmark-based company, on track to fall for a sixth year in 2012, will plunge 73 percent to 0.81 krone in the next 12 months, according to the average of five estimates. Torm deferred debt repayments four times since December.

Automobile Association

Rising gasoline prices may curb consumption. The pump price of regular gasoline in the U.S. rose to $3.767 a gallon on March 4, compared with $3.206 on Dec. 20, data from the American Automobile Association show. A liter (0.26 gallon) of gasoline averaged about 1.61 euros ($2.13) across the 27-nation European Union last week, from 1.48 euros in the first week of December, according to data from the European Commission.

Oil prices are rising because of mounting international tension over Iran, which the U.S. and EU say is developing nuclear weapons. Sanctions on Iranian crude are curbing trade with the second-biggest member of the Organization of Petroleum Exporting Countries, and the nation has threatened to disrupt shipping through the Strait of Hormuz in the Persian Gulf, the transit point for about 20 percent of the world’s crude.

East Coast

The narrowing surplus capacity in product tankers compares with growing gluts elsewhere. The VLCC fleet will expand 6.3 percent this year as demand swells by 3.2 percent, Clarkson estimates. The combined fleet of carriers hauling coal, iron ore and grain will gain 13 percent as the number of cargoes advances 4 percent.

Product tankers are traveling farther because new refinery capacity is being built in Asia, increasing ship owners’ returns from each cargo. European and U.S. East Coast refineries are scheduled to cut about 12 percent of their output by the middle of the year, data compiled by Bloomberg show. They are losing money because they use crude oil priced off Brent, currently trading at a 16 percent premium to the West Texas Intermediate benchmark used by Midwest and Gulf Coast refineries.

India is the largest Asian supplier of refined products to the U.S., and monthly deliveries rose 26 percent to a record 1.9 million barrels last year, Department of Energy data show. India is more than twice as far from New York as Rotterdam.

Scorpio Stock

While Monaco-based Scorpio is expected to report a loss this year, its shares will advance 24 percent to $7.92 in the next 12 months, the average of six analyst estimates shows. Seven of eight analysts covering the company and tracked by Bloomberg recommend buying the shares.

“The two points on the graph are crossing,” said Charles Mantell, the analyst in London who compiles Clarkson’s product- tanker forecasts. “It’s a combination of change in supply and change in demand. Growth in Asia and America will tip into positive. It’s far better than the crude market.”

To contact the reporter on this story: Isaac Arnsdorf in London at iarnsdorf@bloomberg.net

To contact the editor responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net


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