Wednesday, September 7, 2016

Shipping: "Crude Oil Freight Rates Plunge to Record Lows "

From Wolf Street: 

Overcapacity meets broken promises of soaring demand.
The rates for shipping a tanker-load of crude oil by Very Large Crude Carriers (VLCC) from Rotterdam, Europe’s largest port for the throughput and storage of crude oil, to Singapore, the world’s largest crude oil transshipment center, have dropped another $200,000 to $2.25 million, according to S&P Global Platts, the lowest level for that route since Platts started tracking VLCC data in 2006.

That’s down from $6.4 million in January – a 64% plunge in eight months!

Platts blamed the “large supply of available ships” on the Europe to East route.

Overcapacity in face of lackluster demand is a terrifying condition if it spreads far enough across an industry. As prices get totally crushed, it can lead to bankruptcies and the collapse of entire industries, huge job losses, and massive capital destruction that will spread deeper into the overall economy.
Often, investors aren’t the only ones on the hook. Taxpayers, sitting ducks, savers, and other innocent bystanders are shanghaied into bailing out the industries or at least some major players, either directly via government subsidies and other support or indirectly and less visibly via central bank 
shenanigans. That includes GM and Chrysler in the US and Canada during the Financial Crisis. It includes the often state-owned steel giants in China via their state-owned banks.

Overcapacity has been ravaging the container carrier industry. Last week, Hanjin, the seventh largest container carrier in the world and a unit of Hanjin Group, Korea’s tenth largest conglomerate, filed for bankruptcy. It has been torpedoing even large shipbuilders, and the entire industry, particularly in China and Korea, is keeling over.

Overcapacity is the result of misallocation of resources by investors and/or governments that have been fooled by their own optimism, twisted policies, and central bank promises that their QE and a flood of cheap money would actually create real-economy demand.

And overcapacity is now also sinking the oil tanker market.

Platts, in observing crude oil “freight rates near historic lows in a variety of regions” across the VLCC spectrum, added:
The main factor behind the dropping rates has been an increase in global VLCC supply, with a large number of newbuilds joining the existing fleet....