Monday, March 09, 2009
Huge cargoes of crude are anchored, awaiting a price hike
Monday, 09 March 2009
Great fleets of super tankers that once plied the world's oceans, supplying the energy needs of thirsty economies, are finding new employment as floating storage facilities. Oil companies desperate to avoid selling at current depressed prices are mothballing huge quantities of crude in ships as part of a bet that markets will improve if they wait long enough.
"This is an attempt within the market to reduce production and force prices up," said Captain Stephen Brown, president of the British Columbia Chamber of Shipping. "We have seen this before in previous recessions, but it's happening to a much larger extent now. This is a global story. Trade has been hit by a sledgehammer."
Analysts say more than 30 tankers, among the world's biggest ships, are anchored off the coast of the southern United States, Northern Europe and Singapore, containing upwards of 80 million barrels of oil, equivalent to a day's worth of global demand.
Never before has so much oil effectively been put on a shelf, according to Stephen Schork, an independent energy analyst based in Philadelphia, who calls it "one of the hallmarks of a bear market."
Other commodity "dumps" are piling up while awaiting a market recovery. The lumber industry was recently so awash in excess supply that some players resorted to storing boards on railcars that were shunted from city to city until a buyer could be found.
Warehouses at the London Metal Exchange are overflowing with inventories of copper and zinc, while supplies of aluminum are at an all-time high, said BMO Capital Markets analyst Bart Melek.
After trading as high as US$147 a barrel back in July, oil plummeted back to earth, slipping below US$40 as the global economy went into reverse and demand evaporated. Unlike other commodity industries, shutting down production is a slow process. As a result, both conventional and unconventional storage facilities are close to capacity.
A ray of hope recently emerged in the form of rising prices for oil on the futures market, signalling a possible rise in demand.
Base metals, grains and other commodities have followed much the same trajectory as oil. Prices for some metals have recovered in recent days on speculation that efforts by the Chinese government to stimulate the economy will boost demand.
China's State Reserve Bureau plans to buy millions of tonnes of copper, aluminum and other metals while prices are low to top up stock piles, according to Reuters.
Yesterday, copper for delivery in three months rose the highest since December, climbing 1.36% to US$3,735 a tonne on the London Metal Exchange.
But this is taking place against a backdrop of declining employment and a shrinking global economy, which is why analysts predict that the recent rise in some commodity prices is a blip.
As a key player in the commodities sector, the shipping industry is regarded as a barometer of what's ahead, and right now shippers are in the eye of the storm.
Since June, the cost of moving material by sea has fallen by more than 80%, according to the Baltic Exchange Dry Index.
In December, it hit a 23-year low and despite a recent jump shippers are barely covering their costs.
Last week, AP Moller -Maersk A/S, the world's largest container line, warned that profit for 2009 will be "significantly" lower than last year as the company comes under "severe pressure" from the economic downturn.
Because of a decline in demand for their services, players have been taking vessels out of service.
Nearly 400 ships used to carry containers have been laid up worldwide as owners scramble to reduce capacity. In a bid to recover some of their costs, some companies are copying oil tanker owners by offering their excess ships as floating storage facilities to manufacturers looking for a place to store their empty freight containers.
A bigger problem is the looming arrival of hundreds of new ships. During the boom years when demand for bulk carriers and oil tankers was at its height, many shippers put in big orders for new vessels they hoped would allow them to stay competitive, never imagining economic conditions would turn so quickly. They now face the prospect of having to pay for thousands of new ships for which there is no demand.
The London-based ship broker Howe Robinson recently warned of an impending "disaster" as the industry tries to cope over the next three years with the arrival of 3,000 bulk carriers ordered by 479 ship owners.
The company warns that the shipping industry is at the centre of the commodity storm and now faces its most serious crisis in 60 years.
Source: Financial Post
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