The cost of hauling crude on the largest tankers is poised to rise to a four-year high as the biggest demolition program in a decade trims a glut of capacity. Rates still won’t be high enough for owners to break even.
Shipping companies will demolish 23 very large crude carriers in 2013 and scrapping will stay at about that level for the next three years, according to E.A. Gibson Shipbrokers Ltd., a brokerage in London. Daily rates will average $22,000 in 2014, the mean of 10 analyst estimates compiled by Bloomberg News shows. While that’s almost three times more than current earnings, it’s still below the $25,000 that Frontline Ltd. (FRO), which operates 31 of the vessels, says it needs to cover costs.
Rates plunged as much as 97 percent from their December 2007 peak of $229,484 a day as the surge spurred the most orders for new ships since the 1970s, just before the global recession began. That generated the biggest capacity surplus since the mid-1980s and drove Overseas Shipholding Group Inc. (OSGIQ:US) and General Maritime Corp. to seek bankruptcy protection. Freight swaps traded by brokers show rates won’t exceed Frontline’s break-even cost of $25,000 before at least 2015.
“Rates are rising from a devastatingly low level this year and scrapping is helping to reduce the fleet,” said Nicolai Hansteen, chief economist at Pareto Shipping, an Oslo-based research company. “But we’re at the very start of this and there’s still not enough scrapping going on.”
Daily earnings for the vessels, which haul 2 million barrels of crude, averaged $7,296 since the start of 2013, according to London-based Clarkson Plc, the biggest shipbroker. That’s the lowest level in Clarkson data that begin in 1997.
The analysts in the Bloomberg survey are more bullish than the swaps market, which is anticipating $12,565 for 2014 and $16,492 for the following year, according to Marex Spectron Group data. The contracts, known as forward freight agreements, relate to the industry’s benchmark Saudi Arabia-to-Japan route.
Shares of Frontline, led by billionaire John Fredriksen, slumped 19 percent to 15 kroner in Oslo this year. They will drop another 40 percent to 9.02 kroner in 12 months, according to the average of 16 analyst forecasts compiled by Bloomberg. While Mitsui O.S.K. Lines Ltd. and Nippon Yusen K.K. (9101) in Tokyo are the biggest owners, VLCCs represent no more than 7 percent of either Japanese company’s fleet, Clarkson data show.
The VLCC market has 50 to 75 too many ships, equal to as much as 13 percent of the fleet, and owners need to scrap more, Jens Martin Jensen, chief executive officer of Frontline’s management unit, said in a conference call with analysts in August. There are 588 VLCCs in service.
“It is on the ships’ supply side there is an imbalance,” Singapore-based Jensen wrote in an e-mail Oct. 2. “The only way to clear that is to remove tonnage -- scrapping is the way forward.”
The capacity glut is being compounded by contracting U.S. and European oil imports and the slowest expansion in Chinese purchases since at least 2005. The three account for about 52 percent of demand for seaborne crude, according to Clarkson.
U.S. imports, representing about 14 percent of oil carried at sea, averaged 25 percent less this year than the peak in 2005, Energy Department data show. The nation’s crude output is at the highest level since 1992 because of increased extraction of reserves found in shale-rock formations.
China’s imports this year are 3 percent higher than in 2012, poised for the smallest increase in at least eight years, customs data show. The nation’s economy will expand 7.4 percent in 2014, the weakest growth in two decades, according to the average of 57 economist estimates compiled by Bloomberg.
The 28-nation European Union, representing 24 percent of demand, will import 2 percent less oil this year, the equivalent of about 18 fewer supertanker cargoes, Clarkson data show.
Owners reacted to the slump in rates by cutting speeds when tankers sail without cargoes to about 10 knots, from as fast as 13 knots three years ago, according to Dag Kilen, an analyst at Fearnley Consultants A/S in Oslo. Higher rates may spur ships to speed up again, worsening the oversupply of vessels that Fearnley says is the biggest since 1985.
Capacity gluts extend across most of the shipping industry because owners ordered too many vessels before the global recession. The ClarkSea Index (BDIY), measuring earnings for ships across the merchant fleet, averaged $9,332 a day this year, on course for the lowest annual level since at least 1990.
That contrasts with tankers hauling refined oil products, which analysts surveyed by Bloomberg News last month said would be profitable again next year for the first time since 2008. Rising rates are being underpinned by the biggest expansion in Middle East crude refining on record.
The Baltic Dry Index, a measure of the cost of hauling everything from coal to grains, tripled to 2,115 this year, according to the Baltic Exchange, a London-based publisher of prices on more than 50 maritime routes. Rates for iron ore-carrying Capesize ships jumped almost eightfold as China bought record amounts of the steelmaking commodity.
Frontline’s net loss will narrow to $92.9 million in 2014 from $178 million this year, according to the average of 22 estimates compiled by Bloomberg. The Hamilton, Bermuda-based company last reported a quarterly profit for the first three months of 2012 and will only do so again in the initial quarter of 2015, the analysts’ predictions show.
The surge in scrapping is boosting business for yards in India, the biggest destination for tanker demolitions. The nation handled 1.81 million gross tons in 2011, compared with Pakistan’s 1.49 million tons, United Nations data show.
The number of new VLCCs on order as a proportion of the fleet dropped to the lowest level since at least 2005, according to data from IHS Maritime, a research company in Coulsdon, England. Vessels scheduled to be built are equal to 6.4 percent of existing capacity, from as much as 46 percent five years ago, its data show.
“The supply and demand balance will start to correct,” said Nikhil Jain, a New Delhi-based analyst at Drewry Shipping Consultants Ltd., a shipping-research company. “But there’s scope for a lot more demolition.”
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