OREANDA-NEWS. September 18, 2013. China’s smallest oil imports from West Africa in at least two years are curbing demand for tankers on the second-longest trade route, prolonging the worst rates in more than a decade for Frontline Ltd. and other owners.

Chinese refiners will buy 28 percent less West African crude this month than a year earlier, the least in data starting in August 2011, according to loading plans and a Bloomberg News survey of eight traders. Shares of Frontline, which operates 32 very large crude carriers, will drop 35 percent in 12 months, the average of 13 analyst estimates compiled by Bloomberg shows. Those of Euronav SA, with 13 supertankers in its fleet, will retreat 24 percent, the forecasts show.

Tanker owners are enduring a fifth year of declining rates as fleet growth outpaces demand. China’s preference for cheaper Middle East oil over West African supplies shortens voyages by 42 percent, effectively increasing the capacity of the fleet, says ICAP Shipping International Ltd., a shipbroker in London. That’s adding to changes in trade flows as the U.S., the only country that buys more oil than China, meets the highest proportion of its energy needs since 1986.

“Falling shipments point to potentially one more bad month of earnings, which tanker owners could really do without,” Simon Newman, the London-based head of tanker research at ICAP Shipping, said by telephone on Aug. 28. “To avoid an even weaker market, owners will need significant support from shipments out of other areas.”

Annual Average
Daily earnings for VLCCs, each as long as three football fields and able to hold 2 million barrels of crude, plunged 77 percent to USD 4,450 this year, according to Clarkson Plc, the biggest shipbroker. Rates averaged USD 7,599 since the start of 2013, on course for the lowest annual level since at least 1997. They peaked at USD 229,484 in December 2007.

Frontline, led by billionaire shipping investor John Fredriksen, says its ships need USD 25,000 a day to break even. Shares of the company fell 21 percent to 14.70 kroner (USD 2.41) in Oslo trading this year and will reach 9.49 kroner in 12 months, according to the average of 13 analyst estimates compiled by Bloomberg. Hamilton, Bermuda-based Frontline’s net loss will widen to USD 144.7 million this year, the analysts predict.

The industry has about 75 too many VLCCs, equal to 13 percent of the fleet, and owners need to scrap more ships, Jens Martin Jensen, chief executive officer of Frontline’s management unit, said on an Aug. 28 conference call. The company split in two in December 2011 to avoid running out of cash and said last week it may be unable to repay \\$225 million of convertible bonds maturing in 2015 unless the market recovers or it sells shares or assets, reiterating comments first made in February.

Chinese Buying
The bonds, which have a 4.5 percent coupon, last traded on July 30 at 54 cents on the dollar, according to data from Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt may be converted into equity at a stock price of USD 36.5567 until the April 2015 due date, compared with Frontline’s share price in New York of USD 2.42.

China will buy 702,833 barrels of West African crude a day this month, compared with 973,917 a year earlier, the survey and loading programs showed. Total Asian imports from Angola and four other African nations will reach an 18-month low of 1.5 million barrels a day, according to ICAP Shipping. The voyage to China from West Africa takes about 34 days, compared with 20 days from the Middle East, the shipbroker estimates. The longest trade route for oil tankers is between Venezuela and China.

Seaborne Trade
Rising seaborne trade in crude may offset the shorter distances. China bought a record 6.1 million barrels a day in July, customs data show. VLCC shipments to Asia from the Middle East will advance 7 percent to 8.1 million barrels a day this year, London-based Clarkson estimates. China’s combined imports by sea will rise 6 percent to 5.2 million barrels a day in 2013, the shipbroker says.

Concern that unrest in the Middle East and North Africa could disrupt oil supplies may prompt stockpiling, boosting demand for imports, said Harry Tchilinguirian, the head of commodity markets at BNP Paribas SA in London. Protests in Libya, once Africa’s third-largest producer, closed oil terminals and cut output to less than half the 1.6 million barrels pumped daily before the 2011 revolution.

Western nations are debating a military strike against Syria in response to an alleged chemical-weapons attack. While daily Syrian oil output averaged only 164,000 barrels last year, the conflict may disrupt supply across the Middle East, which produced an average of 28.3 million barrels, according to data from BP Plc. The tensions could lead to higher tanker rates in the fall, Jensen said on the conference call.

Capacity Gluts
Capacity gluts extend across the merchant fleet because owners ordered too many ships before the global recession. The ClarkSea Index, a measure of earnings for vessels spanning the fleet, averaged USD 9,086 a day this year, the lowest annual figure since at least 1990. The excess of VLCCs is the biggest since 1985, according to Fearnley Consultants A/S, part of the company that also includes Norway’s second-biggest shipbroker.

Euronav, based in Antwerp, Belgium, operates 23 Suezmaxes, about half the size of VLCCs. Shares of the company dropped 9.6 percent to 4.15 euros (USD 5.47) in Brussels this year and will reach 3.16 euros in 12 months, the analyst estimates show. It will report an \\$85.1 million loss this year, from \\$85.9 million in 2012, according to the mean of six estimates. Refineries in Asia may be out of service for extended periods, curbing oil demand, said Hugo de Stoop, Euronav’s chief financial officer.

“Refineries seem to be getting upgrades, which may mean that downtime will be longer than in previous years,” he said by phone Aug. 30. “The impact on the shipping market is all to do with oversupply. There are just too many ships.”