Here are some comments on the Shipping Sector from KN Research.
- Shipping – tanker
Down it goes
Setting the stage for a weak year. After a spectacular 2008 w hich saw the Dirty Index hitting the high of 2347, it soon fell below the 1,000 mark at the start of the new year and continued drifting to the current all time low of 558. YTD, the average Dirty Index remained to languish at a lowly 650 vs 1510 for 2008.
Tanker rates weaken as oil cargoes dwindle following OPEC production cuts. OPEC which accounted for about 42% of global oil supply in 2008 has agreed to output cuts totalling 4.2m barrels per day (bpd) since Sept 08. The cuts which are the deepest ever are equivalent to about 5% of daily global demand. With an estimated 80% compliance having already such a negative impact on tanker rates, full compliance is estimated to remove an additional 800,000 bpd from the market place which will pressure rates further. So far, OPEC had resisted calls for further output cuts despite the deteriorating global economic environment. Next production review meeting has been slated for May 28.
Lower global oil demand on the back of synchronised global economic slowdown. It is now consensus that 2009 oil demand will shrink with IEA cutting forecast by 1.25m bpd to 84.4m bpd while OPEC predicted a 1.0m bpd demand contraction to 84.6m bpd. Global oil demand was 85.7m bpd in 2008 according to IEA.
New tonnage to add to the woes. Platou forecasts 58m dwt new buildings to be delivered in 2009. Scrapping is estimated at 25m dwt and together with some delays in new build delivery, fleet growth is expected at 5% in 2009. Though estimates vary amongst shipping brokers with Gibson forecasting a lower 5.3% fleet growth while Drewry anticipates fleet growth of 9.0%, market expectation is that tankers rates will continue to soften as supply clearly outstrips demand.
What about floating storage? Use of tankers as oil storage surged again as oil market was in contango. According to the latest OPEC monthly oil market report published in March, estimates had numbers of VLCC involved as oil storage in February 09 at about 35 to 40 vessels. However, the report also highlighted that the extra demand for VLCC storage was not sufficient to offset the effects of lesser oil cargoes from production cuts leading to VLCC rates to fall a further 19% m-o-m in February for the Middle East – to – East route.
Baltic Clean Index not doing well either falling to the all time low of 378 current ly from 623 since the beginning of the year. Similar to crude oil, demand for refined petroleum products declined in tandem with the slower global economy. According to Drewry, average refinery utilisation rates in US dipped to 83.6% in January 09, well below the range of 87.5% - 92.0% seen in the past 5 years.
Cautious outlook for the tanker sector. Further easing of tanker rates for the rest of 2009 seems inevitable in the face of increasing supply while demand tapers off. While we see a 10-15% potential downside for tanker rates from the current level, a collapse akin to the dry bulk market is unlikely given the gradual phasing out of single- hull and mitigating demand from storage. Near term fortune will be dictated by global oil demand which is only expected to be on the mend in 2010. Additional catalyst in sustaining rates could be the phasing out of single-hull, estimated to make up 21% of existing fleet.
No change to our forecasts and recommendation on MISC (HOLD; TP:RM7.80). Though near term earnings w ill be dragged by lower tanker rates and loss making liner division, downside risk to share price is cushioned by its stable LNG operation which contributed c.55% of its pre- tax profit, solid balance sheet with net gearing of only 0.3x and strong backings from Petronas should all help to sustain the group during the current downturn.
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