Tanking sector looks to ride the storm
Policy changes, the economic slowdown and the vagaries of the oil market are assailing the global tanking business. A recovery could follow, but not until around the start of the next decade
Reductions in upstream and downstream investment because of low oil prices and tightening credit availability are likely to undermine long-term growth in the tanker market. In the nearer term, falling consumption of oil this year and production cuts from Opec will also result in lower tonnage demand.
If this is not evident yet, it is because short-term factors have helped give some temporary relief to the tanking sector. A seasonal recovery in OECD oil demand at the start of the winter season helped. And low freight rates have also provided temporary support to tonnage demand so far in 2009. So has the oil market's contango – which makes prices for near-term delivery oil cheaper than oil to be delivered later, encouraging buyers to put crude into storage, often in tankers. Reports suggest that as many as 35 very large crude carriers (VLCCs) and 10 Suezmaxes were fixed for offshore storage (holding up to 80m barrels of crude) in the US Gulf, northern Europe and Asia in January and February.
Low oil prices have also encouraged the US and China – the two main propellers of world oil demand – to resume filling their strategic petroleum reserves (SPRs), which should stimulate tonnage demand this year. The US intends to fill the SPR to its 0.727bn barrels capacity, a rise of 25m barrels in 2009. Between February and April alone, it hopes to have added 12m barrels to the reserve. China's National Energy Administration highlighted its plan to proceed with the second phase of its SPR, which will hold 170m barrels.
All of these factors have supported tonnage demand so far. But bigger forces are likely to reverse this. A contraction in global oil demand this year and consequent production cuts, mainly from Opec, are expected to reduce tanker demand significantly – outweighing the upside potential. Drewry expects tanker demand growth in 2009 to fall below 1% on the year, compared with the average growth rate of around 3.5% in the last four years. Tonnage demand is likely to achieve better growth rates from next year, averaging about 2.6% a year from 2010 to 2013, as the global economy begins to recover.
A change in trading patterns – which generally affect the sector more than movements in the oil price – could also support this recovery, although much depends on the policy decisions of governments concerned about their reliance on imported oil. The US, for example, is heavily dependent on oil imports. But the countries it sources this oil from are changing, increasing the distance it must travel and, consequently, tonne-mile demand.
Over the past five years, there has been a marked decline in US imports from Venezuela (down by 27%), Mexico (–22%), the UK (–45%) and Norway (–53%). While import volumes from Mexico, the UK and Norway are down because of accelerating field declines, imports from Venezuela have fallen for political reasons, as President Hugo Chávez tries to shift exports away from the US to Asia (mainly China).
US imports from Africa (Angola and Algeria), Russia, Brazil and the Mideast Gulf, however, have increased to make up for the loss in imports from nearby countries. This trend is more likely to solidify in the long term if the US continues to be highly dependent on foreign oil suppliers to meet its energy requirements.
President Barak Obama hopes to change this, seeking to eliminate US dependency on oil from the Middle East and Venezuela in the next decade. A shift in this direction might reduce tonnage demand in the long term. In 2007, Venezuela and the Middle East together accounted for about 26% of US crude and petroleum-products imports, according to the US' Energy Information Administration. Obama's comprehensive energy plan includes schemes to promote renewable forms of energy, encourage development of more fuel efficient or hybrid cars, allow limited expansion of offshore drilling and expedite work on clean coal technology and nuclear power generation. These ambitious energy plans pose a significant threat to tanker demand in the long run.
Meanwhile, products tankers could have a more resilient growth picture. New refining facilities in the Middle East and Asia are due to come on stream after 2010, aimed at supplying the Atlantic basin market. This should drive up exports to the region, resulting in higher growth rates (about 4.5% a year) for products tankers over the next five years. By comparison, crude tankers will grow by an average of 2.2% a year.
More products tankers?
However, this expected growth of clean tankers could be undermined if the financial crisis hits refinery-expansion plans. The International Energy Agency has already significantly cut its estimates for crude distillation capacity additions for 2009-13 in the Middle East, from 2.1m barrels a day (b/d) in July 2007, to 1.3m b/d in December 2008.
Tonnage supply grew by a modest 3% in 2008, which is feeble when compared with the average growth in the past three years of 5.2%. But supply is expected to increase again at a rapid pace – rising by 6.6% a year from 2009 to 2012 – with deliveries outpacing demolitions.
At the same time, a rise in new tonnage deliveries in the next four years will depress the market beyond the forecast period. New vessel deliveries, combined with sluggish economic growth, will increase demolition activity in 2009-10, pushing older units to the scrap yards. On average, 40 tankers are expected to be scrapped in each quarter of 2009. Demolitions are forecast to increase further in 2010 to around 270 tankers, following the 2010 Marpol single-hull phase-out deadline. Between now and 2011, 425 tankers are forecast to be scrapped – equivalent to about 12% of the fleet size.
But a bulky orderbook delivery schedule, particularly for the next three years, ensures a high growth rate in tanker supply. Tonnage deliveries are forecast to average 44.6m dead-weight tonnes over the next three years despite delays in the building yards. Shipyard failures and orderbook cancellations are not expected to be very significant in the tanker segment as most orders (about 86%) are in the hands of experienced owners and established yards. Consequently, most of the orders are likely to be delivered, although credit rationing will lead to slippages in deliveries.
This rise in new tonnage capacity is likely to result in bearish market conditions, which will probably keep a check on the flow of new orders for delivery early in the next decade. As a result, tonnage deliveries in 2012-13 are expected to be lower.
Moreover, the incentive to convert older tonnage to dry bulk carriers has faded with the slump in dry rates, and the number of combis (tankers that can handle dry and wet cargoes) trading in oil is expected to rise because of relatively better returns in the tanker market. The number of combis trading in oil has risen steadily over the past few months – from 31 vessels in August to 39 in December. But with the ageing combi fleet and an almost stagnant orderbook, the number of combis trading oil will taper down through the long-term forecast period.
Meanwhile, inactivity during the same period is expected to rise until 2010, after which the start of tanker market recovery from 2011 should enthuse owners to return their vessels to steady operations.
All of this – deteriorating economic conditions, Opec cuts and an accelerating decline in non-Opec output, in conjunction with the exceedingly high volume of tonnage deliveries in 2009-11 – will put considerable strain on freight rates, which are forecast to bottom out in 2011. Low rates through 2009-11 and the approaching single-hull phase-out deadline are expected to push older units to the scrapyards, making room for new tonnage.
Moreover, Asian charterers' growing preference for double-hull tankers is expected to sustain rates for modern vessels, while marginalising the single hulls and pushing them to demolition yards. As a result, hopes remain of a modest recovery in rates (from mid-2011 onwards) when demand picks up alongside an improvement in economic conditions.
Oil demand and Opec output slump
THE UPWARD trend in oil demand of the past few years has been reversed by high oil prices – which rose above $147 a barrel last summer – and the global economic crisis. This has resulted in a sizeable contraction in international trade, as bank letters of credit become increasingly difficult to obtain, harming growth in developing economies. China's growth, for example, fell to just 6.8% in fourth-quarter 2008 – barely half of the 13% growth seen in 2007.
In its latest World Economic Outlook, the IMF has cut its forecast for world GDP growth sharply, from its October estimate of 2.2%, to 0.5% – the lowest rate in 60 years. The IMF forecasts a contraction of 1.7% for advanced economies in 2009, while emerging economies will still see economic growth of 3.4% this year – compared with 6.3% in 2008. As a result, the International Energy Agency (IEA), in its February report on the oil market, reduced its forecast for average oil demand in 2009, to 84.7m barrels a day (b/d) – implying a decline of about 1.0m b/d from 2008 and marking the first time since the early 1980s that demand has declined two years in a row.
While the IMF expects economic growth to rebound to 3.0% in 2010, it notes the importance of successful implementation of co-ordinated efforts by various governments worldwide for expansionary fiscal and monetary policies in pulling in a recovery from 2010.
Opec is likely to react to the continued fall in demand by making deeper cuts to crude production to support prices and fund investment in expansion. In January, Opec crude production fell to 29.03m b/d, and is projected to be significantly lower in 2009. Moreover, accelerating decline rates at ageing non-Opec oilfields (mainly in Mexico and the North Sea) continue to act as a drag on non-Opec supply growth – which is projected to increase by 400,000 b/d to 50.95m b/d in 2009 – but is being eclipsed by cuts to Opec supply (down by 2.21m b/d from the 2008 average).
Plans, estimates scaled back
Opec's long-term capacity plans may also be scaled back as well as its short-term capacity. The IEA's latest estimate for net capacity increase in 2009 has been reduced by about 1.0m b/d since prices began to decline in August – with Opec accounting for about 70% of the reduction. Saudi Arabia and Abu Dhabi are reportedly looking to cut contractor costs for longer-term projects by 10-15%. There are also indications that non-Opec producers may cut upstream capital spending by 10-15% in 2009 – with the largest reductions being made in North America and Russia.