China’s smallest oil imports from West Africa in at least two years are curbing demand for tankers on the third-longest trade route, prolonging the worst rates in more than a decade for Frontline Ltd. and other owners.
Chinese refiners will buy 28 percent less West African crude this month than a year earlier, the least in data starting in August 2011, according to loading plans and a Bloomberg News survey of eight traders. Shares of Frontline, which operates 32 very large crude carriers, will drop 38 percent in 12 months, the average of 14 analyst estimates compiled by Bloomberg shows. Those of Euronav SA, with 13 supertankers in its fleet, will retreat 24 percent, the forecasts show.
Tanker owners are enduring a fifth year of declining rates as fleet growth outpaces demand. China’s preference for cheaper Middle East oil over West African supplies shortens voyages by 42 percent, effectively increasing the capacity of the fleet, says ICAP Shipping International Ltd., a shipbroker in London. That’s adding to changes in trade flows as the U.S., the only country that buys more oil than China, meets the highest proportion of its energy needs since 1986.
“Falling shipments point to potentially one more bad month of earnings, which tanker owners could really do without,” Simon Newman, the London-based head of tanker research at ICAP Shipping, said by telephone on Aug. 28. “To avoid an even weaker market, owners will need significant support from shipments out of other areas.”
Daily earnings for VLCCs, each as long as three football fields and able to hold 2 million barrels of crude, plunged 92 percent this year to $1,515 on Aug. 30, according to Clarkson Plc, the biggest shipbroker. Rates averaged $7,397 since the start of 2013, on course for the lowest annual level since at least 1997. They peaked at $229,484 in December 2007.
Frontline, led by billionaire shipping investor John Fredriksen, says its ships need $25,000 a day to break even. Shares of the company fell 20 percent to 14.75 kroner ($2.43) in Oslo trading this year and will reach 9.18 kroner in 12 months, according to the average of 14 analyst estimates compiled by Bloomberg. Hamilton, Bermuda-based Frontline’s net loss will widen to $144.7 million this year, the analysts predict.
The industry has about 75 too many VLCCs, equal to 13 percent of the fleet, and owners need to scrap more ships, Jens Martin Jensen, chief executive officer of Frontline’s management unit, said on an Aug. 28 conference call. The company split in two in December 2011 to avoid running out of cash and said last week it may be unable to repay $225 million of convertible bonds maturing in 2015 unless the market recovers or it sells shares or assets, reiterating comments first made in February.
The bonds, which have a 4.5 percent coupon, last traded on July 30 at 54 cents on the dollar, according to data from Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt may be converted into equity at a stock price of $36.5567 until the April 2015 due date, compared with Frontline’s share price in New York of $2.42.
China will buy 702,833 barrels of West African crude a day this month, compared with 973,917 a year earlier, the survey and loading programs showed. Total Asian imports from Angola and four other African nations will reach an 18-month low of 1.5 million barrels a day, the data show.
The voyage to China from West Africa takes about 34 days, compared with 20 days from the Middle East, ICAP Shipping estimates. The longest trade route for oil tankers is between Venezuela and China, followed by vessels sailing between the Middle East and U.S.
Rising seaborne trade in crude may offset the shorter distances. China bought a record 6.1 million barrels a day in July, customs data show. VLCC shipments to Asia from the Middle East will advance 7 percent to 8.1 million barrels a day this year, London-based Clarkson estimates. China’s combined imports by sea will rise 6 percent to 5.2 million barrels a day in 2013, the shipbroker says.
Concern that unrest in the Middle East and North Africa could disrupt oil supplies may prompt stockpiling, boosting demand for imports, said Harry Tchilinguirian, the head of commodity markets at BNP Paribas SA in London. Protests in Libya, once Africa’s third-largest producer, closed oil terminals and cut output to less than half the 1.6 million barrels pumped daily before the 2011 revolution.
Western nations are debating a military strike against Syria in response to an alleged chemical-weapons attack. While daily Syrian oil output averaged only 164,000 barrels last year, the conflict may disrupt supply across the Middle East, which produced an average of 28.3 million barrels, according to data from BP Plc. The tensions could lead to higher tanker rates in the fall, Jensen said on the conference call.
Capacity gluts extend across the merchant fleet because owners ordered too many ships before the global recession. The ClarkSea Index, a measure of earnings for vessels spanning the fleet, averaged $9,099 a day this year, the lowest annual figure since at least 1990. The excess of VLCCs is the biggest since 1985, according to Fearnley Consultants A/S, part of the company that also includes Norway’s second-biggest shipbroker.
Euronav, based in Antwerp, Belgium, operates 23 Suezmaxes, about half the size of VLCCs. Shares of the company dropped 9.4 percent to 4.16 euros ($5.47) in Brussels this year and will reach 3.16 euros in 12 months, the analyst estimates show. It will report an $85.1 million loss this year, from $85.9 million in 2012, according to the mean of six estimates. Refineries in Asia may be out of service for extended periods, curbing oil demand, said Hugo de Stoop, Euronav’s chief financial officer.
“Refineries seem to be getting upgrades, which may mean that downtime will be longer than in previous years,” he said by phone Aug. 30. “The impact on the shipping market is all to do with oversupply. There are just too many ships.”
The largest publicly listed owners of supertankers are Mitsui O.S.K. Lines Ltd. (9104) and Nippon Yusen K.K., Clarkson data show. Both companies, based in Tokyo, also own container ships and dry-bulk carriers. Mitsui O.S.K. shares will gain 3.1 percent to 419.50 yen ($4.22) in 12 months as Nippon Yusen rises 13 percent to 324.86 yen, according to the averages of 28 analyst estimates compiled by Bloomberg.
China is favoring Russian and Middle Eastern supply over West Africa because of prices. West African oil is priced off Brent, the North Sea benchmark, while Asian grades track Dubai crude. The Brent-Dubai exchange for swaps rose to $6.28 a barrel on Aug. 30, the highest since October 2011, according to data from PVM Oil Associates Ltd.
The U.S. is buying 12 percent less crude than a year ago as domestic production rises to the highest since 1989, according to Energy Department data. That compounds the effect on VLCC owners because the ships typically take West African oil to China on the return from a Middle East-to-U.S. journey, said Ole Stenhagen, an Oslo-based analyst at SEB Enskilda.
“It used to be that ships heading back to the Middle East stopped by West Africa and took something to China,” said Stenhagen, whose recommendations on the shares of shipping companies returned 51 percent in the past three years. “With the Middle East-to-U.S. route dying away, West Africa will have to carry its own trade.”
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