Monthly Archives: September 2013

Shale Oil: Think Globally, Buy Locally!

Fresh on the heels of a recent marketing campaign of the most ‘forward thinking’ i-concept yet, some may wonder whether the Jones Act tanker market in the US is exhibiting one of its best ever performances yet based on the dislocations caused by the status quo and possibly hard-to-substantiate assumptions.  Although in the summer Reuters first reported that the MT „AMERICAN PHOENIX” Jones Act product tanker was sub-leased to ExxonMobil by Koch Industries for one year at a rate of $100,000 pd, a recent article in a shipping trade publication erroneously stretched that charter to a grand total of five years, still at $100,000 per diem.  (We happened to know the true charterers and rates, and it’s not what it has been reported beyond what it was written in the Reuters article). Basing investment calculations on rates similar to $100,000 pd for 5 years as exciting and attractive as they may be, they can only lead to mis-calculations, disappointment and undue attention.

Shale oil discoveries and production oil and natural gas liquids (NGLs) in the US and overseas are definitely a game changer for world geo-economics, and such development will definitely provide a strong competitive advantage to the US versus other industrially developed / developing countries.  The shortest and best telling exhibit of such an advantage can be seen in the price differential of natural gas between approximately $3.5 / MMBtu at Henry Hub (Louisiana) and about $15 / MMBTU at DES Japan / Korea Marker (JKM) with an approximate $4.5 / MMBtu freight cost differential between the two markets; in other words, the base cost of energy input in the industrial value chain is one-fourth in the US than in Japan; although slightly better in Europe, still it’s three times as high than in the US.

Jones Act Tanker MT „FLORIDA" (Image Source: Courtesy of Crowley Maritime Corporation)

Jones Act Tanker MT „FLORIDA” (Image Source: Courtesy of Crowley Maritime Corporation)

Oil produced in the US is illegal to be exported (on a commercial, sustainable basis), based on laws enacted primarily in the aftermath of the 1970 oil shocks (Mineral Leasing Act of 1920, the Energy Policy and Conservation Act of 1975, and the Export Administration Act of 1979, and the so-called short supply controls in the Export Administration Regulations (EAR) of the Bureau of Industry and Security (BIS) where the restrictions are duly defined.)  Therefore, based on the status quo, oil produced in the US has somehow to slosh in the US and that can only be done by rail cars, pipelines and tankers, Jones Act tankers that is. Ergo, the exuberance on the Jones Act tanker market. Since our last posting on the Jones Act market, there have been a firm order for an additional two tankers by clients of Seabulk Tankers at NASSCO, and a reported Letter of Intent (LOI) for additional four tankers by an institutional investor at the ailing Avondale  Shipyard (part of Huntington Ingalls Industries ) based in Louisiana. For those in the knowing, an LOI sometimes is worth as much as the paper it’s written on, but so far, the orderbook of firm orders for Jones Act tankers stands at fourteen vessels with production solidly filled till late 2016, with four more options plus the potentially four at Avondale.

Transporting Oil in the US (Source: Valero)

Transporting Oil in the US (Source: Valero Energy Corporation)

Domestic US oil production has increased from 5 million bpd in 2008 to 7.4 million bpd in 2012, while at the same time US imports of crude oil have dropped from 9.2 to 8.4 million bpd. All along, US oil consumption has dropped by 10% or 2 million bpd from 2008 till now. Major shale oil production came from the Bakken fields in North Dakota and the Permian Basin and Eagle Ford fields in west and southwest Texas, while the primary US ‘refinery corridor’ is lined up along the east part of the US Gulf Coast (USGC) and the US East Coast (USEC). According to a recent investment presentation by the world’s largest independent refiner Valero Energy (ticker: VLO), it costs about $15-17 /bbl to transport oil by rail from Bakken to USEC which is less or tantamount to the cost by rail / pipeline from Bakken to USGC and then by (Jones Act) tanker to USEC. All along, Valero estimates their cost of supplying oil from Eagle Ford to their Quebec refinery on foreign-flag vessels at $2 / bbl (crude oil exports to Mexico and Canada are allowed, and thus Valero’s ability to by-pass the Jones Act tonnage in this instance.)

The economics of transporting oil within the US whether by rail, pipeline or by sea (barges or tankers) are tight, and for now, the bottleneck / dislocation has caught many people by surprise.  However, there are strong efforts for the building of the TransCanada Keystone XL pipeline and expanding the railroad capacity from North Dakota (Bakken) to USEC (and elsewhere.) Given that US refineries are oriented for sour and heavy crudes, the economic argument has been made, some times vocally and sometimes discreetly but always against great criticism from many fronts, that in today’s economic world it would make more economic sense for the US to export its domestically produced high quality oil and logically highly priced (West Texas Intermediary (WTI) and Louisiana Light Sweet (LLS)) and import cheaper, lower quality crudes. Since the shale oil boom, the spread between WTI and Brent has been as wide as -$25 / bbl, meaning the better quality WTI is lower priced than lower quality Brent (compared to WTI.) While recently the gap has narrowed significantly and almost a month ago their pricing approached parity momentarily, the gap has widened again to -$6 /bbl.

Oh, the economics and the logic behind the world’s energy needs…but again, if there were no inefficiencies, there would be no opportunities for exorbitant profit whether in the international tanker markets in the past or the Jones Act tanker market at present… and again, we were told in Econ 101 that capitalism is about exploiting needs and efficiencies…just don’t make a bet that the market will be inefficient forever or before the payback period of a highly priced Jones Act product tanker newbuilding order…

© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co.

No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders.

China’s Raw Power and Steel Strength

The capesize market has kept enjoying a robust September so far with freight rates approaching the magical level of $40,000 pd (not seeing since 2011) for a round-voyage trip between Brazil and China. Given that rates were at about $5,000 pd in early June this year, the freight increase is phenomenal and most-welcome in an otherwise uninspiring shipping market, in general.

The increase in the cape market has been triggered by China’s elevated iron ore mostly (and some coal) import activity over the same period. This time however, more of the imports (proportionally) were originating from Brazil than the previous mini-peak of the market earlier this year; Brazilian imports usually absorb three times as much capesize tonnage as Australian imports do due to distance, which explains partially the freight increase.  It is not known yet whether the increased iron ore imports are purely for inventory replenishing purposes or due to increased iron ore production, as updated, reliable statistics are not available yet.  This differentiation between end-production and stock piling in general is useful as the latter explanation equates to ‘stuffing the channel’ improvement. It is known that Chinese iron ore stockpiles have been maintained at the 20-day mark this year (about 70 million tons), while in the last few years that mark was at about 30-to-40 days of demand. Also, the price of steel plate at Chinese shores increased from about $100/ton in late May to $130/ton at present after briefly setting a recent high of about $140/ton.

The recent rally in the cape market has not really spread proportionally to other asset classes in the dry bulk market, and the crude tanker market is definitely under renewed duress.  The big question then becomes whether the cape rally is sustainable and it can be an inflection point for the shipping market.

Iron ore and metallurgical coal are used for the production of steel, which to be used for infrastructure projects, construction, in heavy industries, etc In a sense, the steel industry and its health thereof is an integral parameter to the health of the of the iron ore trade (and capes.)

A recent article in Week in China, a Hong Kong-based insightful weekly publication about Chinese matters, about the steel industry got us thinking.  Here are few major points: there are about 21,000 steel mils in China according to the Research Center for Chinese Politics and Business at Indiana University, ranging from the heavyweights like the state-owned, publicly listed companies like Baoshan Iron and Steel (Baosteel) to start-up steel makers.  In 2012, about 715 million tons of steel was produced in China, and the industry overcapacity stands at about 300 million tons, for a total overall capacity of more than one billion tons per annum.  This is not a typo, Chinese steel production capacity exceeds demand by 300 million tons per annum; to put this into perspective, the whole annual European steel production stands at 150 million tons presently, so China’s spare capacity is twice Europe’s annual production.  Chinese steel mill utilization rate has remained in the 70-80% range in the recent past. [The European steel industry has tremendous overcapacity in its own right, in full disclosure, as capacity stands at 2008 levels of 200 million tons per annum].

So, how an industry with 40% overcapacity (much worse than that in shipping, actually) and a low utilization rate (again, lower than in shipping) gets to make money?  Glad that you asked!

In an article titled ‘In a precarious state,’ Week in China reports that Chinese steel firms have run a debt tab of RMB 3 trillion (US$ 490 billion).  About three-quarters of these loans are bank loans and in general have short maturities, usually less than one year, and thus they will have to be re-financed in the immediate future. Focusing on the established and most solid players, the largest 30 steel mills in China have outstanding loans of RMB 760 bln (US$ 125 bln). As we mentioned in previous posting, China’s ‘shadow banking’ is estimated at about US$ 2 trillion, so any way one slices the data, the steel industry has a significant share of it; some have argued that the steel industry may be of higher cause of concern than overstretched property developers and local government financing vehicles.  A recent study by Morgan Stanley titled ‘China Deleveraging, Can the banks tide out a financial storm’, ‘Ferrous metal smelting & pressing’ is the most underperforming industry and by far the highest risk of concern to their lenders.

steel plates

Chinese steel mills, without any government subsidies, in general lose RMB 100 – 300 per ton produced (about $15 – 50 per ton.) All inclusive, the industry’s margin is as thin as 0.04%.

China’s recent ‘rebalancing efforts’ have taken into consideration ‘excess capacity’, and officially the government has ordered 1,900 companies in the steel, aluminum and concrete industries to be shut down; about seven million metric tons of steel capacity to be taken out of the market by the end of September 2013 (about 2.5% of the 300 mil ton overcapacity.)  The curbing is rather mild, and as Reuters’ article emphasizes: “Beijing’s previous efforts to rein in “blind expansion” in some sectors have been thwarted by local governments that have offered cheap land, tax deductions, subsidies and loans to attract investment, the People’s Daily said on Tuesday, citing a spokesman for Ministry of Industry and Information Technology.” However, one cannot ignore the writing on the wall…

Chronic overcapacity may be interpreted that if/when the Chinese economy grows again at 15%, there will be plenty of ‘shovel ready’ plants to rev up production, which would be an immediate blessing for the iron ore and cape markets… But again, all this overcapacity will have to be kept alive until then, either by political will or at considerable destruction of wealth…

The recent cape rally has partially attributed to Brazil’s iron ore coming back to the market after an exceptionally heavy rain season earlier in the year and port facilities becoming available again. Chinese steel mills, especially the smaller ones and the ones with their debt financing coming due immediately, kept buying iron ore despite increasing prices of the commodity in an effort to ‘keep the bicycle moving’: once they stopped buying and producing, despite the government’s edict and the bad economics of their production, banks would be much more inclined not to re-finance loans coming due…

Far from us being ‘dragon slayers’ (pessimists on China) and would rather side with the ‘Panda lovers’ camp (optimists on China); and, no-one said that Chinese local politics and statistics are always translucent and that China does not have the magic to surprise. However, it seems that the Chinese steel industry, the cornerstone of any sustainable cape recovery, may just not be the rock where great fortunes can be build upon at present.

© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co.

No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders.

Quotes and Expressions Inspired by the Sea

In Sea affairs, nothing is impossible, and nothing is improbable.’                                                                                                                     Admiral Lord Nelson, writing from HMS Victory in 1804

ὦκα δ᾽ ἐφοπλίσσαντες ἐνήσομεν εὐρέι πόντῳ.                                                                               When that ship has been made ready and is fit to sail, we’ll launch it out into the broad sea.                                                                      Homer, Odyssey, Book B, Line 295

Bundìn er bàtlaus mađur  (Bound is boatless man)                                                                                                                                               Norwegian (Viking) Expression

Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.                                                                                                                                                         Mark Twain

If you want discoveries to be made, let your ships sail a bit haphazardly on the high seas.                                                                             Harvey Sachs

We are tied to the ocean. And when we go back to the sea, whether it is to sail or to watch – we are going back from whence we came.                                                                                                                                                                        John F. Kennedy

But let there be spaces in your togetherness and let the winds of the heavens dance between you. Love one another but make not a bond of love: let it rather be a moving sea between the shores of your souls.                                                                                                                                                                                                        Khalil Gibran

If you want to build a ship, don’t drum up people to collect wood and don’t assign them tasks and work, but rather teach them to long for the endless immensity of the sea.                                                                                                  Antoine de Saint-Exupery

Men go abroad to wonder at the heights of mountains, at the huge waves of the sea, at the long courses of the rivers, at the vast compass of the ocean, at the circular motions of the stars, and they pass by themselves without wondering.                                                                                                                                                                Saint Augustine

When the seagulls follow the trawler, it is because they think sardines will be thrown into the sea.                                                                                                                                                                                                                                          Eric Cantona

There is a tide in the affairs of men, which taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries. On such a full sea are we now afloat. And we must take the current when it serves, or lose our ventures.                                                                                                            William Shakespeare

Love one another, but make not a bond of love: Let it rather be a moving sea between the shores of your souls.                                                                                                                                                                                                          Khalil Gibran

Timid men prefer the calm of despotism to the tempestuous sea of liberty.                                                                                                     Thomas Jefferson

Fishes live in the sea, as men do a-land; the great ones eat up the little ones.                                                                                                 William Shakespeare

For life and death are one, even as the river and the sea are one.                                                                                                                      Khalil Gibran

Earth and sky, woods and fields, lakes and rivers, the mountain and the sea, are excellent schoolmasters, and teach some of us more than we can ever learn from books.                                                                                             John Lubbock

As different streams having different sources all mingle their waters in the sea, so different tendencies, various though they appear, crooked or straight, all lead to God.                                                                                                 Swami Vivekananda

As fire when thrown into water is cooled down and put out, so also a false accusation when brought against a man of the purest and holiest character, boils over and is at once dissipated, and vanishes and threats of heaven and sea, himself standing unmoved.                                                                                                       Marcus Tullius Cicero

The sea does not reward those who are too anxious, too greedy, or too impatient. One should lie empty, open, choiceless as a beach – waiting for a gift from the sea.                                                                                                           Anne Morrow Lindbergh

O wise man! Give your wealth only to the worthy and never to others. The water of the sea received by the clouds is always sweet.                                                                                                                                                               Chanakya

The sea, once it casts its spell, holds one in its net of wonder forever.                                                                                                             Jacques Yves Cousteau

We must free ourselves of the hope that the sea will ever rest. We must learn to sail in high winds.                                                                                                                                                                                                                   Aristotle Onassis

The fishermen know that the sea is dangerous and the storm terrible, but they have never found these dangers sufficient reason for remaining ashore.                                                                                                                           Vincent Van Gogh

When I was a boy the Dead Sea was only sick.                                                                                                                                                   George Burns

You can’t cross the sea merely by standing and staring at the water.                                                                                                               Rabindranath Tagore

God moves in a mysterious way, His wonders to perform. He plants his footsteps in the sea, and rides upon the storm.                                                                                                                                                                                                William Cowper

It is better to meet danger than to wait for it. He that is on a lee shore, and foresees a hurricane, stands out to sea and encounters a storm to avoid a shipwreck.                                                                                                                     Charles Caleb Colton

Following the light of the sun, we left the Old World.                                                                                                                                         Christopher Columbus

Ships are the nearest things to dreams that hands have ever made.                                                                                                                  Robert N. Rose

You can’t change the wind, you can, however, adjust your sails.                                                                                                                        Unknown

Hoist your sail when the wind is fair.                                                                                                                                                                          Proverb

I find the great thing in this world is not so much where we stand, as in what direction we are moving – we must sail sometimes with the wind and sometimes against it – but we must sail, and not drift, nor lie at anchor.                                                                                                                                                                                    Oliver Wendell Holmes, Jr.

The cure for anything is saltwater — sweat, tears, or the sea.                                                                                                                                Isak Dinesen

She sent him a warm and gentle wind,                                                                                                  and Lord Odysseus was happy                                                                                                                  as he set his sails to catch the breeze.                                                                                                    He sat beside the steering oar                                                                                                                and used his skill to steer the raft.                                                                                                                                                                                Homer

There is, one knows not what sweet mystery about this sea, whose gently awful stirrings seems to speak of some hidden soul beneath…                                                                                                                                                                   Herman Melville

If one does not know to which port one is sailing no wind is favorable.                                                                                                               Seneca

There are some things you learn best in calm, and some in storm.                                                                                                                        Willa Cather

To young men contemplating a voyage, I would say go.                                                                                                                                          Joshua Slocum

He that will not sail till all dangers are over must never put to sea.                                                                                                                     Thomas Fuller

That’s what a ship is, you know – it’s not just a keel and a hull and a deck and sails, that’s what a ship needs. But what a ship is,… really is, is freedom.                                                                                                                                            Captain Jack Sparrow

Men go back to the mountains, as they go back to sailing ships at sea, because in the mountains and on the sea, they must face up.                                                                                                                                                                         Henry David Thoreau

My soul is full of longing, For the secret of the Sea,                                                                             And the heart of the great ocean, Sends a thrilling pulse through me.                                                                                                             Henry Wadsworth Longfellow

Build a deck high up on it, so it can carry you across the misty sea.                                                     I’ll provision it with as much food and water and red wine                                                                  as you will need to satisfy your wants. I’ll give you                                                                        clothes and send a favoring wind blowing from your stern,                                                                so you may reach your own native land unharmed,                                                                               if the gods are willing, the ones who hold wide heaven,                                                                whose will and force are mightier than my own.                                                                                                                                                 Calypso to Odysseus – Homer

To be successful at sea we must keep things simple.                                                                                                                                         Pete Culler

Fortune brings in some boats that are not steered.                                                                                                                                            William Shakespeare


 

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