China Oil Contraction Sinks Industry’s Biggest Tankers: Freight

China’s oil imports are contracting for the first time since 2009, reducing the biggest source of demand for crude tankers at a time when U.S. purchases are slowing and owners face the worst capacity glut in three decades.

The world’s second-biggest economy bought 2.1 percent less crude in the first five months, compared with an 11 percent expansion in the same period in 2012, customs data show. Tanker owners are already losing money and freight swaps indicate rates won’t be profitable before 2015. Shares of Frontline Ltd. (FRO), the shipping company led by billionaire John Fredriksen, will retreat 38 percent in the next 12 months, according to the average of 14 analyst estimates compiled by Bloomberg.

The World Bank cut its forecast for the global economy on June 12, citing weaker growth in China, which accounts for about 15 percent of demand for seaborne crude cargoes. Shipments to the U.S., the second-largest importer, will drop 10 percent this year as domestic output expands, shipbroker Clarkson Plc estimates. The glut of very large crude carriers, each hauling 2 million barrels, is the biggest since 1985, according to Fearnley Consultants A/S, an Oslo-based research company.

“The crazy levels of Chinese import volumes we saw two to three years ago aren’t coming back,” said Ole Stenhagen, an analyst at SEB Enskilda in Oslo whose recommendations on shipping equities returned 30 percent in the past three years. “We need stronger demand growth than we’re getting now, and we need to see more ships taken out of the fleet.”

Football Fields

Frontline’s net loss will widen to $123.9 million this year from $95.4 million in 2012, according to the mean of 19 analyst estimates. Shares of the Hamilton, Bermuda-based ship owner fell 25 percent to 13.8 kroner this year in Oslo trading and will reach 8.56 kroner in 12 months, the forecasts show.

The company said May 30 it may need to raise cash to repay $225 million of convertible bonds due in April 2015 if oil-shipping markets don’t recover by then. The notes, which may be converted into equity until their due date, trade at 47.45 cents on the dollar, Exane Paris prices on Bloomberg show.

VLCCs, each the length of three football fields, earned $5,813 a day this year, the least in Clarkson data that begins in 1997. Frontline says it needs $25,500 to break even. Rates won’t exceed $14,200 before the end of 2015, according to data from the Marex Spectron Group, a freight-swaps broker in London.

The tanker fleet expanded 26 percent since the end of 2007 as trade in seaborne oil retreated 3.5 percent. Overseas Shipholding Group Inc., the largest U.S. owner of VLCCs, and New York-based General Maritime Corp. sought Chapter 11 bankruptcy protection in the past two years.

Energy Agency

The VLCC fleet has about 20 percent too much capacity, estimates Sverre Bjorn Svenning, an analyst at Fearnley. The glut was last bigger in 1985, and that led to idling and scrapping across the industry, he said.

China’s crude imports are dropping because of weaker demand for gasoil from manufacturers, according to Matt Parry, an analyst at the International Energy Agency. A purchasing managers’ index for China published by HSBC Holdings Plc and Markit Economics fell to 49.2 in May, the lowest since September. Gasoil consumption fell 0.5 percent in the first four months, Bank of America Merrill Lynch said in a June 5 report.

The Chinese economy will expand 7.7 percent this year, the World Bank said June 12, cutting its previous forecast of 8.4 percent. The Washington-based group reduced its estimate for the global economy to 2.2 percent from 2.4 percent.

Largest Refineries

Declining oil shipments to China were partly caused by buyers reducing inventories, said Harry Tchilinguirian, an analyst at BNP Paribas SA in London. Purchases may rebound in the second half of the year, he said.

Imports into China reached 23.95 million metric tons in May, customs data show. While that was 3.8 percent more than in April, volumes were still 6 percent lower than a year earlier. The nation’s largest refineries operated at an average 84.2 percent of capacity on May 30, from 81.5 percent a year earlier, according to industry website Oilchem.net.

China is expanding its emergency crude stockpiles and that will boost demand for imports, data from the Paris-based IEA show. The nation has built and filled storage tanks holding 161 million barrels of oil, according to the agency’s estimates. That will reach 500 million barrels by the end of 2020, or enough to fill about 250 supertankers, the IEA says.

Any rebound in cargoes probably won’t be enough to halt the slump. Frontline’s Fredriksen said June 6 he expected no recovery in crude-tanker markets for at least two more years.

Swaps Traders

The billionaire split Frontline in two in December 2011 to withstand the slump in tanker rates. The new company, Frontline 2012 Ltd. (FRNT), is amassing a fleet of fuel-efficient vessels that will carry cargoes including liquefied petroleum gas and iron ore as well as oil.

VLCC rates plunged in the past year and owners were losing $2,914 a day on average in mid-February, the latest data from Clarkson show. Swaps traders are betting that average monthly earnings on the Saudi Arabia-to-Japan route, the industry’s benchmark, won’t exceed $11,000 in the second half of this year.

Slumping rates and capacity gluts extend across most of the merchant fleet. The ClarkSea Index, a measure of industrywide earnings from London-based Clarkson, averaged $8,684 a day in the first quarter, the lowest since 1992.

Seaborne Trade

Fewer oil sales to China are being compounded by slowing demand around the world. U.S. imports last year were 16 percent below their peak in 2006, according to London-based BP Plc. (BP/) Domestic production rose at the fastest pace since at least 1965 as horizontal drilling and so-called fracking unlocked supplies trapped in shale formations. Shipments to the U.S. represent about 14 percent of the seaborne market, Clarkson estimates.

The European Union’s 27 member states take a combined 23 percent of global seaborne crude trade. The 17-nation euro region contracted every quarter in 2012 and won’t expand again until the final three months of this year, according to the median of 29 economist estimates compiled by Bloomberg.

VLCC owners will scrap about 2.1 million deadweight tons of capacity this year, from 2.7 million tons last year and 3.3 million tons in 2011, Clarkson estimates. About 2 percent of the fleet is 20 years old or more, the age at which ships would normally be considered for demolition.

“It’s China that’s the growth driver for this market,” said Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo whose recommendations on the shares of shipping companies returned 20 percent in the past year. “Nowhere else in Asia will balance out this contraction in Chinese demand.”

To contact the reporter on this story: Rob Sheridan in London at rsheridan6@bloomberg.net

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

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