The current rock-bottom demand for supertankers to carry crude oil from the Arabian Gulf is about to be driven lower by a new pipeline between Myanmar and China, due to open next month.
The 771-kilometre pipeline from Kyauk Phyu on Myanmar's Yanbye Island to Kunming in Yunnan province will shorten the time to move Middle Eastern oil by eight days, inflicting more pain on a sector saddled by a chronic capacity glut and lower earnings, shipping analysts and energy experts say.
Capable of carrying 440,000 barrels of crude per day (bpd), the US$1.5 billion pipeline, operated by China National Petroleum Corporation (CNPC), will cut into the tonne-mile demand for the tankers - known as very large crude carriers (VLCCs) - during the second half of this year, said Simon Newman, an analyst at Icap Shipping, in a research note.
"We estimate that delivering crude to the pipeline cuts 2,561 nautical miles off a voyage. At full capacity this corresponds to a cut of 56 billion tonne-miles, or 3 per cent of the Chinese tonne-mile demand in 2012," Mr Newman wrote. "Assuming half of the vessels using the pipeline option originate from West Africa and half from the Middle East, this would curb demand by four VLCCs per annum."
The pipeline is expected to move 22 million tonnes per year of crude into Yunnan province, said CNPC and account for about 7 per cent of China's total crude imports at the level's expected this year.
China's crude imports are projected to rise to 6 million bpd this year, according to the International Energy Agency, but Icap does not believe that much of this increase will improve demand for VLCCs. Instead the analysts expect it to be absorbed into the Yunnan pipeline and the expanding pipeline between Kazakhstan and China. China bought more than 50 per cent of its oil from the Middle East last year.
The shorter trip for tankers is worrying VLCC owners, whose freight earnings have declined since 2010.
"Given the current status of the VLCC market, any reduction on the tonne-mile voyages will impact the health of the market," said Platts, the energy intelligence provider. "If there is less demand for long-haul voyages, the tonne-miles drop, while shorter voyages mean vessels are taken for a shorter duration and hasten their availability for the next voyage.
"That means day rates for very large crude carriers, which have slid 98 per cent since 2007 to average $3,270 this year, are unlikely to recover."
Nikhil Jain, a tanker analyst at Drewry Shipping Consultants, said he expected a further erosion in demand.
"It will definitely have a negative impact because Chinese growth is smaller and much of it is going to come by pipeline," he said.
According to Frontline, the second-largest owner of supertankers with 33 VLCCs, charter rates will not top the company's $24,200-a-day break-even level for at least two more years. Its shares have plunged 69 per cent to 11.15 kroner in Oslo over the past year.