Rising Asian demand for naphtha and a shortage of ships hauling the oil product used in everything from Barbie dolls to car parts will boost freight rates to a four-year high and return Scorpio Tankers (STNG:US) Inc. to profit.
European ports loaded 1.35 million metric tons in November, the most since January 2010, according to data compiled by Bloomberg from shipbrokers’ reports. The tankers will earn $16,250 a day in 2013, 52 percent above prevailing rates this year, the median of four analyst estimates shows. Shares of Scorpio Tankers, which operates 30 vessels, will gain 21 percent in the next 12 months, based on the average of nine predictions.
Rates are surging after owners switched tankers to more profitable crude oil and other so-called dirty cargoes in the past two years. The vessels need to be decontaminated before they can carry refined products again. That diminished a glut of tanker capacity just as imports by Japan, Asia’s third-biggest buyer, expanded in the longest streak since 2007.
“Demand is stronger than it has been for years,” said Robert Bugbee, the New York-based president of Scorpio Tankers. “We have seen the fundamental trend for tanker rates to Asia shift for the better. The market for naphtha is exceeding our expectations, and so we are much more optimistic.”
Shares of Monaco-based Scorpio Tankers gained 34 percent to $6.53 in New York trading this year, compared with a 21 percent slump in the 11-member Russell 2000 Shipping Index. (RGUSPSSH) The stock will reach $7.87 in 12 months, the highest since July 2011, the analyst predictions show. The company will report net income of $5.73 million for next year, against a loss of $23 million in 2012, according to the mean of six estimates. Profit is expected to reach $24.6 million in 2014.
Other owners include Hellerup, Denmark-based Torm A/S (TORM), which operates Europe’s biggest fleet. Shares of the company, which deferred debt repayments five times since December, tumbled 47 percent in Copenhagen trading this year. Torm will narrow its net loss to $115 million in 2013 from $297 million for this year, the mean of six estimates showed.
Rates slumped to a record low of $1,516 a day in March as Japan’s naphtha stockpiles contracted to the smallest since 1995, government data show. Industrial production plunged after the temblor and tsunami in March 2011 shut nuclear power plants, curbing electricity supply to factories. As manufacturing accelerated, naphtha imports expanded every month since August, the longest streak in five years, according to government data.
Declining rates spurred owners (STNG:US) to switch 44 tankers to fuel oil and other dirty cargoes since the start of 2011, data from London-based E.A. Gibson Shipbrokers Ltd. show. To carry refined products, the ships would first have to clean their tanks and then haul three gasoil cargoes at a discount before they could be chartered for naphtha again, according to ICAP Shipping International Ltd. in London.
The fleet expanded faster than demand for eight consecutive years, according to London-based Clarkson Plc, the world’s biggest shipbroker. Owners accelerated orders for new vessels in 2008, when freight rates were three times higher than this year, and capacity grew 25 percent since then. Cargo volumes rose 13 percent over the same period.
Stalling economic growth would curb demand for the plastic consumer goods made with the ethylene derived from naphtha. The oil product is also used to make gasoline. The 17-nation euro area slumped back into a recession last quarter and the International Monetary Fund cut its 2013 global growth forecast twice since July, to 3.6 percent.
Japan sank into recession in the third quarter, when gross domestic product shrank an annualized 3.5 percent after contracting in the prior three months, the Cabinet Office said yesterday. China, Asia’s biggest naphtha buyer, slowed for seven consecutive quarters before this one, and South Korea, the region’s second-largest importer, grew 0.1 percent during the three months through September, central bank data show.
Next year’s projected tanker rate would still only be about $3,250 more than owners need to break even, according to estimates from RS Platou Markets AS, an Oslo-based investment bank. The five-year average is $18,999 and returns reached $76,228 in August 2008, Clarkson data show.
Rates may keep rising because the pace of new vessels leaving ship yards is slowing. The global fleet of product tankers will expand 1.8 percent in 2013 as trade gains 4.8 percent, Clarkson (CKN) estimates.
The number of vessels hauling naphtha to Asia in October was almost 40 percent higher than in July, according to Poten & Partners Inc., a New York-based shipbroker and consultant. Japan’s industrial output gained 1.8 percent in October, the most since December 2011, government data show. China said Dec. 1 its official manufacturing index reached a seven-month high.
Scorpio has been expanding its fleet as naphtha demand strengthened, Bugbee said. That included chartering a ship for six months from January, with options to extend that by another 18 months.
“It’s Japan’s acceleration in imports that has been the driving force behind the increased cargo demand,” said Erik Nikolai Stavseth, an Oslo-based analyst at Arctic Securities ASA whose recommendations on the shares of shipping companies returned 15 percent in the past year. “Product tankers look increasingly attractive.”
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