Feature: Tankers dance to US and Chinese market drums
After five years of depressed demand following the bank meltdowns of September 2008, tanker owners are wondering if 2014 is the year when they turn the corner back to profitable operations.
After five years of depressed demand following the bank meltdowns of September 2008, tanker owners are wondering if 2014 is the year when they turn the corner back to profitable operations. It has been a long, painful recession and the surviving players in the tanker sector are in need of some solace. The suffering of the lean years was exacerbated by the need to assimilate the raft of newbuilding tankers ordered, over-exuberantly, before the global financial crisis broke. Freight rates which lingered at levels below breakeven for sustained periods forced a number of ship owners to restructure and scrap assets.
There are a number of positive signs that better times are on the way, not least the early shoots of recovery that western economies are managing to push up. In addition, global seaborne trade as a whole grew by a healthy 3.8% last year, a rate close to shipping’s 50-year average. In the very large crude carrier (VLCC) sector freight rates experienced a five-fold increase during the last quarter of 2013, albeit from a desultory level.
Business in general is more upbeat about future prospects. Investor confidence rebounded in 2013, reflected by the volume of money ploughed into equities across the board. The Dow Jones Industrial Average index jumped 26% last year while Japan's Nikkei index surged nearly 60%.
Participants in the tanker sector were also buoyed by the news that 22 VLCCs were sold for demolition last year, up from 14 in 2012, and the highest level since 2003 when a record number of such vessels were scrapped.
Worryingly for the fleet supply/demand balance, there was also something of a rebound in ship orders in 2013, and the VLCC orderbook is now equal to 12% of the existing fleet in capacity terms. However, the new orders are also a reflection of the more optimistic outlook amongst owners, while another year of healthy recycling levels in 2014 will help reduce the threat of overtonnaging.
The US, China and Europe are the three principal centres of oil demand and the three legs on which the global tanker trades are balanced. Europe’s economic recovery is stuttering at best and tanker owners don’t hold out much hope that demand for oil in the region will drive any requirement for increased tonnage in the foreseeable future.
As a result the tanker shipping community has its future hopes pinned on the US and China, the world’s two largest energy markets. Changes are afoot in both countries that are already beginning to impact the call on tanker capacity.
The US has traditionally been the principal buyer of crude oil on the global market. However, the shale oil boom of recent years has pushed up domestic production volumes and reduced the need for crude imports. In 2013 US crude oil production recently averaged 7.7 million barrels per day (bpd) versus the 7.6 million bpd that was imported. The country’s net petroleum imports last year were the lowest since 1991. Thanks primarily to shale oil production, US crude production is forecast to continue rising, to around 9.6 million bpd in 2019.
US Gulf refineries processing the light, sweet crudes produced from shale are now being left with excess volumes that are loaded onto product tankers for export. The shipment of refined petroleum products to overseas customers is the only realistic safety valve available to the country as exports of crude oil from the US are prohibited under a law that dates back to the Arab oil embargo of the early 1970s.
A resumption of crude oil exports after a gap of 40 years has recently become a topic of hot political debate in the US. The logistics challenges of refining the growing volumes of shale oil becoming available in the US Gulf could well prompt an en end to the embargo on crude exports.
Irrespective of the outcome of this debate, the US is importing less and less crude oil. Shippers of crude to world markets have been fortunate to have the burgeoning demand for oil in China to take up the slack caused by the reduced presence of the US in the international crude oil market.
China imported 282 million tonnes (mt) of crude oil in 2013, 4% ahead of the previous year and a new record. That volume is equivalent to 5.6m bpd and China is currently purchasing about three-quarters of the volume of crude that the US is buying.
It was the strong demand for oil in China that drove the surge in VLCC freight rates in the last quarter of the year, from around USD 10,000 per day in September to above USD 50,000 on certain days in December, the highest level since 2009. Although the rates eased back to around the USD 30,000/day level in early January 2014, no further reductions are expected in the coming months.
For owners of VLCCs and Suezmaxes this substitution of China for the US as a destination for their cargoes has so far been a mixed blessing. The tonne-miles lost on voyages from the Middle East Gulf are being compensated for by the cargoes loaded in the Atlantic Basin for the long journey to China. The volumes shipped East from the Atlantic Basin are expected to increase in the years ahead.
A number of pundits are warning that the large tanker sector is moving towards a period of over-reliance on the Chinese demand for oil at the same time that the country’s economy is cooling. China’s gross domestic product (GDP) expanded by about 7.6% in 2013. While that may have been the slowest pace in 14 years, it remains a healthy expansion rate by any other country’s standards. China’s GDP growth is set for a similar performance in 2014.
The sheer size of this Asian nation’s economy, with its 1.3 billion population, and its drive for further industrialisation, bode well for energy suppliers. China is now the world's largest auto market, for example, and almost 22 million vehicles were sold nationwide in 2013. Another year of double-digit growth in car sales is expected in 2014.
Because the current demand for oil is close to the world’s production capacity, the crude market will remain a volatile one, subject to the vagaries of geopolitics and local unrest in countries like Libya and South Sudan. Notwithstanding such uncertainties, global oil production is forecast to grow by 1.2 million bpd this year, to reach 92.4 million bpd.
For its part, the tanker fleet stands poised to deliver the product to where it is needed and, thus, to continue to oil the wheels of industry and commerce. Chinese charterers will continue to play a prominent role in the marketplace in 2014 while tanker owners in general are looking forward to a year in which earnings, on average, will be at least 20% ahead of those achieved last year.