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Tanker Rates Pain Prolonged as China Imports Pass U.S.: Freight

Photographer: Qilai Shen/Bloomberg

Crude imports into China averaged about 5.5 million barrels a day last year, according to customs data. Close

Crude imports into China averaged about 5.5 million barrels a day last year, according to customs data.

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Photographer: Qilai Shen/Bloomberg

Crude imports into China averaged about 5.5 million barrels a day last year, according to customs data.

The rout in rates for tankers that haul 20 percent of the world’s crude is poised to last another two years as China passes the U.S. as the world’s biggest oil importer, causing voyage durations to contract.

Shipments to China will rise as much as 9 percent to 6 million barrels a day by December, while net U.S. imports will drop at least 19 percent next year and fall below that level, the Organization of Petroleum Exporting Countries said April 2. That means day rates for very large crude carriers, which have slid 98 percent since 2007 to average $3,270 this year, are unlikely to recover because journeys from the Persian Gulf to Shanghai are 7,500 miles shorter than deliveries to Houston.

OPEC’s prediction comes as U.S. dependence on imports shrinks and underscores how much more quickly China is growing than the rest of the world. Sea trade will also be curbed as Saudi Arabia and Russia, the biggest exporters, supply more oil to the world’s second-largest economy by pipeline. For Frontline Ltd., the second-largest owner of the ships, it means charter rates won’t be above its $24,200-a-day break-even level for at least two more years.

“The decline in U.S. oil-import demand will translate into less tonnage demand,” said Nikhil Jain, a New Delhi-based tanker analyst at Drewry Shipping Consultants, an industry researcher. “It will definitely have a negative impact because Chinese growth is smaller and much of it is going to come by pipeline.”

China bought more than 50 percent of its oil from the Middle East last year, customs data show. A voyage to Shanghai is 5,938 nautical miles (6,833 miles), compared with 12,500 nautical miles to Houston, according to sea-distances.com.

Vessel Glut

Rates have plunged as owners ordered the most new ships in 2007 and 2008 since at least the 1990s, just as the global economy entered the worst recession since World War II. The vessels will earn $19,500 this year, according to the average of 10 analysts’ estimates compiled by Bloomberg. Charters won’t exceed $18,500 a day before 2015, according to freight swaps data from Marex Spectron Group, a broker of the contracts.

Shares of Frontline, (FRO) which has 33 of the carriers, plunged 69 percent to 11.15 kroner in Oslo in the past year. They will decline another 14 percent within 12 months, according to the average of 18 analysts’ estimates compiled by Bloomberg. The company’s 2013 net loss will widen to $128.1 million from $95.4 million in 2012, the average of 18 analyst estimates compiled by Bloomberg shows.

Jens Martin Jensen, the chief executive officer of Frontline’s management unit, declined to comment.

New Ships

Owners may get a break because the fleet expansion is almost over. Asian ship yards are building VLCCs with capacity equal to 6.4 percent of existing vessels, the smallest proportion since at least 2005, according to data compiled by Bloomberg from IHS Fairplay, a Redhill, England-based research company. That compares with 47 percent in August 2008.

China’s thirst for oil may also replace the U.S. as buyer of cargoes from Venezuela, Mexico, Colombia and Nigeria, according to RS Platou Markets AS, an Oslo-based investment bank. Voyages from those countries to the Asian nation would be about four times longer than to the U.S.

Crude imports into China averaged about 5.5 million barrels a day last year, according to customs data. The U.S.’s net imports, which include exports of gasoline and other fuels, averaged 7.4 million barrels a day, according to the Energy Department.

Refinery Growth

China will become the bigger buyer as its growing refining capacity boosts demand at a time when a U.S. oil-fracking boom cuts the need for foreign supplies, OPEC said.

The U.S., which buys about 15 percent of all crude cargoes, needs fewer as it produces the most domestic crude in almost 21 years and the nation’s economy expands by 2 percent. China, the largest destination for supertankers, will grow 8.1 percent, according to the average of 52 forecasts.

Oil consumption will increase 0.9 percent to 90.6 million barrels a day this year, according to the International Energy Agency, a Paris-based adviser to 28 nations.

That won’t aid tanker owners. The largest is Mitsui O.S.K. Lines Ltd. (9104) in Tokyo, which also has vessels ranging from liquefied natural gas carriers to iron-ore transporters to container ships, according to Clarkson.

Mitsui O.S.K. will report a net loss of 172.3 billion yen ($1.7 billion) for the year ended March 31, before earning 23.4 billion yen in the financial period that began this month, according to the average of 28 analyst estimates compiled by Bloomberg.

World Trade

Expanding economies will help the rest of Mitsui O.S.K.’s fleet cope with a glut across the maritime industry. World trade will rise 3.6 percent this year and 5.3 percent next, the International Monetary Fund said April 16. The ClarkSea Index, an overall measure of costs for shipping, averaged $9,928 a day last month, 20 percent more than in February. About 90 percent of trade moves by sea, according to the Round Table of International Shipping Associations.

Frontline split in two at the end of 2011 to withstand the rout in rates, placing the newest ships, which are more likely to be chartered, into Frontline 2012 Ltd. The original company said Feb. 22 it may not be able to repay $225 million of convertible bonds due April 2015 unless earnings rebound, or more equity or assets are sold.

Pipelines to China will also curb demand for seaborne oil. Deliveries through Russia’s link across east Siberia, which account for 5.5 percent of Chinese imports, will double to 743,000 barrels a day in the next five years. The planned June opening of a 440,000 barrel-a-day pipeline from Myanmar, bypassing the Strait of Malacca, will trim 3 percent from China’s tanker demand, ICAP Shipping International Ltd. estimates.

Zero Need

Daily U.S. seaborne purchases will plunge by 4 million barrels within seven years, and America won’t need cargoes at all by the end of the decade, Citigroup Inc. estimates. That’s bad for owners because China National Petroleum Corp., the country’s largest oil producer, expects total import growth of 2.3 million barrels over the same period.

“It does very little to improve conditions,” said Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo. “A decline in volumes to the U.S. and slower growth to China hits the crude tanker market head on.”

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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