The Indian rupee’s slump to a record low is curbing tanker
demolitions, prolonging a capacity glut and the most unprofitable freight rates
in at least 16 years.
Shipping
companies sold 22 for demolition in the first half, from 35 in 2012, according
to Clarkson (CKN) Plc, the biggest shipbroker. Indian yards, which break up the
most tankers, buy in dollars and sell scrap in rupees, which weakened 9.7
percent against the U.S. currency this year, according to ACM Shipping Group
Plc, a shipbroker in London. The largest tankers, yielding about 37,500 metric
tons of steel, fetched $14 million in May, 6.9 percent less than a year
earlier, Clarkson data show.
Lower
prices in India are being mirrored by competitors in Pakistan, Bangladesh and
China, deterring sales of obsolete ships, according to Global Marketing Systems
Inc., the largest buyer. That’s prolonging the biggest capacity glut in
supertankers since 1985 at a time when seaborne crude imports by China and the
U.S., the two largest consumers, are declining. Rates were unprofitable in all
but four months since July 2010 and freight swaps anticipate at least two more
years of losses.
“Weakness
in the rupee hinders an already huge need to scrap ships and return this market
to a more balanced state,” said Erik Folkeson, an analyst at Swedbank First
Securities AS in Oslo whose recommendations on the shares of shipping companies
returned 17 percent in the past two years. “A mix of soft demand, high vessel
deliveries and little scrapping is devastating to the tanker market.”
Freight Swaps
Returns
for very large crude carriers, the industry’s biggest vessels, averaged $6,234
a day in the first half, the worst for the period since at least 1997, Clarkson
data show. Frontline Ltd., the largest VLCC operator until last year, says it
needs $25,500 to break even. Rates won’t exceed that level before 2016 at the
earliest, according to freight-swaps data compiled by Bloomberg.
Shares
of Frontline, based in Hamilton, Bermuda, slumped 32 percent to 12.55 kroner
($2.04) in Oslo this year. They will decline another 32 percent to 8.51 kroner
in 12 months, according to the average of 14 analyst forecasts compiled by
Bloomberg. The company, founded by billionaire John Fredriksen, reported losses
every year since 2011 and will stay unprofitable through at least 2015, the
analyst estimates show.
Mitsui
O.S.K. Lines Ltd. (9104), based in Tokyo, is the biggest owner of VLCCs, which
haul 2 million barrels of oil. Shares of the company, whose fleet includes gas
carriers and container ships, climbed 58 percent to 401 yen ($3.97) this year.
Mitsui said in April it would return to profit as a weakening yen boosts the
value of repatriated dollar earnings.
Current Account
The
rupee plunged after the shortfall in India’s current account widened to a
record 4.8 percent of gross domestic product in the year ended March 31.
Foreign investment in Indian debt fell by $5.37 billion in June, the most since
at least 2008, according to Securities and Exchange Board data.
The
expansion of the fleet is slowing after a five-year surge driven by freight
rates that rose as high as $229,000 in November 2007. The biggest VLCC-building
program in four decades is now ending, with outstanding orders for new vessels
equal to 10 percent of existing capacity, according to IHS Fairplay, a Redhill,
England-based research company. The proportion was 48 percent five years ago.
Fleet
capacity will expand 2 percent this year, compared with 5.9 percent in 2012 and
7.8 percent in 2011, according to London-based Clarkson, the world’s biggest
shipbroker.
Financial Support
The
supply of new ships may be curbed after China Rongsheng Heavy Industries Group
Holdings Ltd. (1101), China’s biggest ship yard outside state control, said
July 5 that it’s seeking financial support after a plunge in orders. A third of
the nation’s yards may shut down in five years, the China Association of
National Shipbuilding Industry said.
The
losses in shipping extend across other parts of the merchant fleet, with the
ClarkSea Index, a measure of returns across the industry, averaging $9,139 a
day in the second quarter, Clarkson data show. It was the third-worst quarter
in the past two decades.
Some
parts of the fleet are recovering as demand catches up with capacity. Tankers
hauling gasoline and diesel between Europe and the U.S. are earning $13,744 a
day, the most for this time of year since at least 2009, according to data from
the Baltic Exchange, a publisher of freight rates on more than 50 trade routes.
Charter costs of $74.38 a ton for vessels carrying liquefied petroleum gas are
close to a record.
Investment Banking
The
capacity glut in VLCCs is about 20 percent, the most since 1985, according to
estimates by Sverre Bjorn Svenning, an analyst at the research unit of Astrup
Fearnley Group, an Oslo-based shipping-services and investment-banking company.
Frontline
said May 30 it may need to raise cash to repay $225 million of convertible
bonds due in April 2015. The debt may be converted into equity at $36.5567
until the due date, compared with the company’s share price in New York of
$2.01. The notes trade at about 51 cents on the dollar, Exane Paris prices on
Bloomberg show.
India
demolished 8.76 million tons of ships in 2011, with tankers accounting for 21
percent of the total, according to United Nations data. The remainder mostly
comprised bulk carriers, container ships and passenger vessels. China handled
6.35 million tons of scrapping, Bangladesh 5.96 million tons and Pakistan 3.45
million tons.
“Demolition
has been one of the big hopes as a catalyst for the tanker market recovering,”
said London-based Marc Pauchet, a senior analyst at ACM Shipping. “To have such
a weak rupee is profoundly unhelpful.”
Source: Business Week. By Rob Sheridan and Alaric
Nightingale. 8 July 2013
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