Rates Rising as Record Chinese Oil Imports Affect Ships
Wednesday, 25 April 2012 | 00:00
Record Chinese oil imports are emptying the Atlantic Ocean of very large crude carriers and their 2 million-barrel cargoes, driving a rebound in rates for the smaller vessels left to supply the U.S. from West Africa.
Suezmaxes, each holding 1 million barrels, will earn an average of $18,750 a day this quarter, 45 percent more than now, according to the median of six analysts surveyed by Bloomberg. That’s 25 percent more than the $15,000 anticipated in forward freight agreements, traded by brokers and used to bet on rates, providing an opportunity for profit. Shares of Nordic American Tankers Ltd. (NAT), which owns 20 of the vessels, will rise 10 percent in 12 months, according to the average of eight forecasts.
China, which is importing 11 percent more oil than a year ago to expand stockpiles, is buying more from Nigeria and Angola as alternatives to supply from Iran, whose exports are plunging because of sanctions over its nuclear program. VLCC earnings jumped as much as 63 percent this year as the longer journeys and extra cargoes diminished a glut of vessels. Suezmaxes slid 56 percent in part because their carrying capacity made them more expensive for voyages from the Atlantic to the Pacific.
“VLCCs are getting picked up by China as much as possible, and Suezmaxes are still in the Atlantic to do business,” said Urs Dur, a New York-based analyst at Clarkson Capital Markets LLC, the investment-banking unit of Clarkson Plc, the world’s biggest shipbroker. “The market is figuring out that this is a cheaper way of moving a million barrels to the U.S.”
Suezmax rates fell to $12,915 this year, the lowest since November, as VLCCs rose as high as $51,413, the most since June 2010, data from Clarkson show. While the smaller ships are still 4.3 percent costlier a barrel than supertankers once expenses such as fuel and port fees are included, the five-year average is 22 percent, according to Poten & Partners Inc., a tanker consultant in New York. Suezmaxes usually trade at a premium because their smaller size means they can call at more ports than VLCCs.
China imported an average of about 800,000 barrels a day of crude from Nigeria and Angola in February, part of that month’s record 6 million barrels a day of purchases, customs data show. Combined imports were 5.2 million barrels a day in February 2011. The two West African countries will ship 1.1 million barrels a day to China next month, according to data from schedules detailing how much crude will be loaded onto tankers.
The Asian nation, already the biggest destination for VLCCs with cargoes, will overtake the U.S. next year as the largest customer for the fleet of tankers of all sizes, according to Arctic Securities ASA, an investment bank in Oslo. Fourteen percent of VLCCs were signaling China as their destination on April 20, compared with 2 percent of Suezmaxes, ship-tracking data compiled by Bloomberg show.
Among the biggest threats to Suezmaxes in the Atlantic is a decline in U.S. cargoes as the world’s biggest economy curbs its dependence on overseas shipments by boosting domestic production to an 11-year high. Total imports averaged 8.9 million barrels a day last year, the least since 1999, according to the Energy Department. U.S. oil consumption will decline 1.1 percent to 18.7 million barrels a day this year, the Paris-based International Energy Agency estimates.
U.S. East Coast refineries are closing at the fastest pace in at least two decades because they rely on West African oil whose price reflects that of Brent crude, according to data compiled by Bloomberg. Midwest rivals use cheaper domestic supply. Benchmark West Texas Intermediate trades at $102.29 a barrel in New York and Brent is at $117.79 in London.
Gauge of Rates
That may curb demand just as new Suezmaxes leave shipyards, with outstanding orders equal to 22 percent of existing capacity, the most of any major tanker class, according to data from Redhill, England-based IHS Fairplay. The fleet expanded 21 percent to 440 ships since the end of 2008, a year in which rates averaged $73,863, IHS and London-based Clarkson data show.
Suezmaxes are not the only class of merchant vessel contending with a glut. The fleet of VLCCs will expand 6.5 percent this year as demand advances 3.6 percent, Clarkson estimates. The number of VLCCs rose 12 percent to 560 since the end of 2008, according to IHS. The Baltic Dry Index, a gauge of rates for shipping coal and iron ore, fell 37 percent this year, according to the London-based Baltic Exchange, which publishes costs across more than 50 maritime routes.
While the $18,750 predicted for Suezmaxes by the analysts is 24 percent below the first-quarter average, it’s above the $16,400 that Hamilton, Bermuda-based Frontline Ltd. (FRO) says it needs to break even. The company, which lists 17 Suezmaxes in its fleet, will narrow its net loss to $52.5 million this year from $529.6 million in 2011, the mean of 18 analyst estimates shows. Frontline rose 34 percent in Oslo trading this year.
Jens Martin Jensen, chief executive officer of the company’s management unit, declined to comment.
Nordic American, also based in Hamilton, advanced 16 percent to $13.95 in New York and will reach $15.38 in 12 months, the estimates show. The company, which operates only Suezmaxes, will report a loss of $38.6 million for 2012, narrowing from $72.3 million last year, the mean of five estimates shows.
“Suezmaxes are very versatile,” Herbjorn Hansson, Nordic American’s chief executive officer, said by phone yesterday. “When there is increased demand for VLCC ships in the Far East, you could envisage a stronger need for Suezmaxes, or Suezmaxes are alone to have the market for themselves in a way in the Atlantic basin.”
China will complete eight new emergency oil-stockpiling centers by early next year, part of a strategy to raise reserve capacity to 271.8 million barrels from 103.2 million, according to China National Petroleum Corp., the nation’s largest crude producer. That’s enough for about 28 days of consumption, IEA data show. The U.S. Strategic Petroleum Reserve has almost 700 million barrels, according to the Energy Department.
Asia will buy 1.8 million barrels of West African oil a day in May, compared with 1.3 million in September, according to a survey of five traders and data from loading programs. Shipments are rising in part to compensate for lost supply from Iran, the second-biggest member of the Organization of Petroleum Exporting Countries. Sanctions will cut Iran’s daily production to 2.6 million barrels by mid-2012, from 3.55 million at the end of last year, the IEA said in a report April 12.
“Atlantic activity for Suezmaxes will pick up at the expense of VLCCs,” said Frode Morkedal, an analyst at RS Platou Markets AS in Oslo whose recommendations on the shares of shipping companies returned 8.3 percent in the past six months. “Traders historically have been willing to pay a bigger premium for Suezmaxes because they are so much more flexible, so I would expect the spread to start moving back to normal.”