frank a shrontz vlcc

VLCC Owners Brace for Heavy Rolls

Total Views: 9
August 28, 2012
frank a shrontz vlcc
Frank A. Shrontz, a 310k DWT VLCC, image (c) Frontline
For the first time this year, slowing growth in oil demand is spurring analysts to cut estimates for earnings in the tanker industry’s largest vessels.

Rates for very large crude carriers, each hauling 2 million barrels, will average $21,250 a day in 2012, 5.6 percent less than previously forecast, based on the median of 12 estimates compiled by Bloomberg. Frontline Ltd., the biggest operator, will report a second consecutive annual loss and shares of the Hamilton, Bermuda-based company will drop 27 percent in 12 months, the average of as many as 18 analyst predictions shows.

The International Energy Agency, an adviser to 28 nations, reduced its oil-demand forecast on Aug. 10 and predicted slower growth in 2013. Stockpiles in the U.S., the biggest importer, are already near a 22-year high, Energy Department data show. Slower growth will worsen the glut in shipping, with the VLCC fleet projected to expand 6.9 percent in 2012, according to Clarkson Plc. The world’s biggest shipbroker anticipates demand for the vessels will rise 3.9 percent.

“The modest increase in oil consumption is not going to be enough to turn the crude-tanker market around,” said Martin Korsvold, an analyst at Pareto Securities AS in Oslo, whose recommendations on shipping equities returned 30 percent in the past two years. “We don’t think tanker operators are going to get any material relief until 2014.”

Annual Average

VLCC earnings plunged 73 percent to $8,191 since the start of January and averaged $31,127 so far this year, Clarkson data show. Rates are volatile, moving 29 percent or more in five of the past seven months. The annual average predicted by the analysts would be the lowest since 1999 and below the $24,100 that Frontline says it needs to break even.

Frontline, founded by billionaire John Fredriksen, will narrow its loss to $21.76 million this year, from $529.6 million in 2011, the mean of 16 estimates shows. Overseas Shipholding Group Inc., the largest U.S. tanker company, said in a filing Aug. 7 it will be about $100 million short of the funds it needs to repay $1.5 billion of loans by February. The New York-based company has reported 13 consecutive quarterly losses.

Shares of Frontline, which operates 42 VLCCs, dropped 13 percent to 22.09 kroner in Oslo trading this year and are predicted to reach 16.11 kroner in 12 months, based on the median of 18 estimates. Oil fell 4 percent to $94.83 a barrel on the New York Mercantile Exchange and the MSCI All-Country World Index of equities advanced 8.4 percent. Treasuries returned 1.9 percent, a Bank of America Corp. index shows.

World oil demand will increase by 870,000 barrels a day this year, compared with January’s estimate of 1.08 million, and 830,000 barrels in 2013, the IEA said. It was the first time the Paris-based group had predicted weaker growth for next year.

Monetary Fund

The International Monetary Fund cut its 2012 forecast for growth in world trade to 3.8 percent from 4 percent last month, down from 5.9 percent in 2011. The 17-nation euro area contracted 0.2 percent in the second quarter and China has been slowing since the beginning of last year. Europe accounts for 21 percent of oil consumption and China 11 percent, according to data from London-based BP Plc. The Asian nation is the biggest destination for laden VLCCs.

Rates may exceed the predicted $21,250 because owners are slowing down vessels to reduce fuel costs, their biggest expense. That effectively reduces capacity as voyages lengthen. The VLCC fleet sailed at an average of 9.57 knots last month, compared with 11.55 knots three years earlier, according to data compiled by Bloomberg.

Fleet Expansion

Fleet growth this year may be smaller than anticipated as owners scrap older vessels. Companies will send 3.6 million deadweight tons of capacity for demolition this year, compared with 3.3 million tons in 2011, Clarkson estimates. The existing fleet is 183.2 million deadweight tons, a measure of carrying capacity.

The pace may also slow after owners held off ordering new vessels. Orders at shipyards reached 48 percent of existing capacity in 2008, just after rates peaked at $229,000, and were last at about 10 percent, according to data from IHS Inc., an Englewood, Colorado-based research company.

The IEA’s forecast for slowing demand growth in 2013 may be partly offset by shifting trade patterns that are lengthening tanker journeys. About 700,000 barrels a day that used to be delivered within the Atlantic is now going to Asia, according to Tufton Oceanic Ltd., a shipping hedge fund managing about $1 billion of assets. China will overtake the U.S. next year as the largest customer for all sizes of crude tankers, estimates Arctic Securities ASA, an Oslo-based investment bank.

Oil Consumer

VLCC rates slumped 84 percent since the beginning of April, after jumping as much as 67 percent in three months as buyers stockpiled crude in anticipation of an embargo on Iranian supply. The 27-nation European Union agreed to impose sanctions on OPEC’s third-biggest member in January, phasing in the curbs through July 1. The U.S. and EU say Iran’s nuclear program is aimed at producing atomic weapons while the government in Tehran says it is for civilian purposes.

China, the second-largest oil consumer, stockpiled about 90 million barrels in the first five months of the year, the most since preparing for the 2008 Olympics in Beijing, government data show. U.S. inventories rose 9.4 percent this year and are within 6.9 percent of the 387.3 million barrels reached June 15, the highest level since 1990.

Investment Banking

The scale of reserves is diminishing demand for ships, with 109 Middle East cargoes scheduled to load this month, compared with an average of 132 in the first half, according to Nordea Markets in Oslo, the investment-banking unit of the world’s fourth-largest shipping lender. Clarkson’s predicted 3.9 percent growth in VLCC demand this year compares with a 5.3 percent expansion in 2011.

Crude reached $110.55 a barrel in New York in March because of concern that Iran would retaliate against EU sanctions by blocking the Strait of Hormuz, the transit point for about 20 percent of the world’s oil. Prices then tumbled 30 percent, before rebounding when the full sanctions started in July.

“Some special effects with tensions around Iran made the market look stronger than it really was,” said Marius Magelie, an Oslo-based analyst at ABG Sundal Collier ASA, whose recommendations on shipping companies returned 20 percent in the past year. “Lower oil consumption means lower demand for transportation.”

– Isaac Arnsdorf, (c) 2012 Bloomberg

Back to Main