Rai, Neena; Gross, Jenny. Wall Street Journal (Online) [New York, N.Y] 15 Apr 2013
After several years of losses, some oil-tanker operators are struggling to survive.
Encouraged by high charter rates, ship owners ordered tankers before the onset of the financial crisis. But now demand is drying up because of the weaker global economy and fewer shipments to the U.S.
"The current market is unviable and poses a serious threat to the sustainability of the supply chain," says Bill Box, a spokesman for oil-tanker operators' association Intertanko. The association forecasts that the world's combined large and midsize tanker fleet has accumulated losses of more than $26 billion since 2009 as rates have fallen below operating costs.
For the largest ships--so called Very Large Crude Carriers, which can carry up to two million barrels of oil--the average charter rate on the Mideast-to-Japan route is around $7,085 a day, far below the operation cost of $10,000 to $12,000 a day. The rate peaked at $309,601 a day in 2007.
Ship owners are running their vessels at a loss because some of the companies' short-term operating costs are fixed, regardless of whether they haul, and need to pay those bills. Others, largely because of rising fuel costs, have opted to drop anchor.
Analysts and ship owners say too many ships are in operation and some tankers that were ordered during the boom years are only being delivered now. The global crude tanker fleet, which includes VLCCs, will grow by 3.3% this year, says Peter Sand, chief shipping analyst at the Baltic and International Maritime Council, a shipping-industry association.
"Even though the global tanker fleet growth is slowing, not enough ship scrapping has taken place. Demand cannot do all the work to alleviate the pain for the sector," says Simon Newman, head of oil-tanker research at London-based broker ICAP PLC.
The International Energy Agency in April cut its monthly forecast for 2013 global oil demand to 795,000 barrels a day from 820,000 barrels, citing worsening business sentiment in China, as well as economic woes in Europe and the U.S.
Also, a surge in output from U.S. and Canadian shale formations has lowered U.S. crude imports sharply, reducing the need for tankers and making it unlikely that demand for the ships will pick up, says Olivier Jakob, managing director of Swiss consulting firm Petromatrix GmbH. The U.S. Energy Information Administration says U.S. oil imports will fall to six million barrels a day by 2014, the lowest level since the 1980s.
Saudi Arabia and the United Arab Emirates meanwhile are ramping up refining, so instead of exporting crude oil on tankers, the countries will ship oil products, Mr. Jakob says. Oil products typically are carried on different vessels than crude is. "These developments are not supportive for the long-haul tanker market," he says.
Frontline Ltd., one of the world's largest crude-oil shipping companies, reported a $83.8 million net loss for last year, compared with a $529 million loss a year earlier, and said it wouldn't pay a fourth-quarter dividend. The Bermuda-based company also warned that, failing a market recovery by 2015, it may not be able to repay a $225 million bond.
"Crude tankers are going through one of the worst winters ever," Frontline said when it reported its results in February. "Several tanker companies are already experiencing severe problems, and if the weak market continues, it is likely to lead to significant financial problems for the whole tanker industry." Frontline's shares are down more than a third this year.
New York's Overseas Shipholding Group Inc. filed for bankruptcy protection late last year, citing the tough market.
"We have great difficulties seeing the tanker market coming back to balance sometime soon. We see a completely flat demand picture for tankers," says Petter Haugen, a shipping analyst at investment firm DNB Markets. Mr. Haugen has a "sell" recommendation on shipping companies Frontline, Belgium-based Euronav NV and Greece's Tsakos Energy Navigation Ltd.
Drewry Shipping Consultants Ltd. says fleet expansion should lose steam after this year as global orders for new tankers shrink. "With less than 13 million deadweight tonnage ordered in 2012, Drewry Maritime expects the tanker fleet to grow at a relatively slower pace," the firm said recently. Drewry also predicted that more crude oil will start moving east from the Mideast and West Africa, particularly to China.
Bruce Chan, chief executive of Teekay Tankers Ltd., one of the world's largest owners of midsize crude-oil tankers, says rates likely will rise next year because fewer new ships are entering the market.
Bermuda-based Teekay reported a $370.2 million net loss for last year, compared with a $113.1 million loss a year earlier, after it was forced to write down the value of its vessels by $353 million. Teekay's shares have fallen 11% this year.
Write to Jenny Gross at
Credit: By Neena Rai and Jenny Gross