When an executive goes out of their way to suggest competitors should shut down capacity you know there are issues in an industry. That's exactly what Frontline Ltd. (NYSE:FRO)'s John Fredriksen did last week after the company reported another terrible quarter. Fredriksen said companies owning tankers older than 15 years should scrap them to reduce supply in a vastly oversupplied industry.
He might be right that dumping supply is the best option but usually bankruptcy sorts out these kinds of things and by the look of how things are going in the tanker business that's what I see on the horizon.
Demand is gone and never coming back When very large crude carriers, or VLCC, rates were commanding over $200,000 per day in 2007 the industry relied on massive U.S. oil imports and growing imports in China. Since then, U.S. oil production has jumped dramatically, reducing the need for imports, and China has built pipelines to replace some of its shipping needs.
U.S. imports from the Persian Gulf are down 28% since 2004, requiring 691,000 fewer barrels of oil.
Asian demand is still rising but even those imports are coming from shorter distances. Shipbroker Clarkson Plc says Asian demand from the Middle East will grow 7% this year to 8.1 million barrels per day but West African Crude demand, which takes 14 days longer to travel to Asia than the Middle East, will fall 28% to 703,000 barrels per day.
Combine falling shipping demand from the U.S. with shorter distances traveled to Asia with an oversupply of tankers and you have terrible operating conditions for tanker owners. Estimates put the overcapacity at 75 VLCCs, or 13% of the entire fleet.
Trouble across the industry The companies with the most exposure to oil shipping are feeling the most pain right now. Frontline Ltd. (NYSE:FRO), Nordic American Tanker Ltd (NYSE:NAT), and Teekay Corporation (NYSE:TK) have all been reporting losses since 2011 and given the average dayrate of $7,397 this year for VLCCs and a breakeven cost of about $25,000 there's a lot of room for improvement.
Some are predicting an improvement as the economy improves but the long-term trends are working against oil tankers. Oil consumption is falling in developed countries as costs rise and alternatives become attractive, trends that I don't see changing. These companies are in such a deep hole that some won't dig out, which is the only way supply will be reduced as John Fredriksen wants.
The article The Tanker Business is Sunk originally appeared on Fool.com and is written by Travis Hoium.
Fool contributor Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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