Why China’s financial woe affects oil shipping (tanker) companies (Part 1)

Crude Oil ImportEnlarge GraphChina and the shipping industry

The shipping industry relies heavily on China. To see why, investors look at two metrics: exposure and variance.

Exposure: How big is China in global trade?

In 2010, global crude oil import amounted to roughly 43.7 million barrels per day, based on the U.S. Energy Information Administration (EIA)’s numbers. In those days, the United States, which historically has been one of the largest importers of crude oil, imported 9.2 million barrels a day. China, which ranks second and in front of Japan, imported 4.8 million barrels, approximately half of the United States’ imports. This means what happens to the United States and China has a significant influence on world oil shipments.

World Crude Imports 2013-07-09Enlarge Graph

Variance: Measuring the changes in oil imports

But mere exposure is not enough. Investors also consider the variance, or the degree of change, that a country’s oil import may experience in the future, because variance affects future tanker (ships that haul oil across the ocean) demand, which in turn affects shipping rates. The chart above shows that oil shipment has been driven by a decline of 64 million metric tonnes a year in import to the United States, which was led by an energy boom (see US oil imports fall to a record low since 2007, oil shipping (tanker) outlook remains negative). On the other side of the picture, oil shipments were positively driven by China’s economic growth of about 8% to 9%, which led to an increase of 92 million metric tonnes of oil imports over the past five years.

Although Japan is still a major importer of oil, its economy isn’t growing due to the lost decade. The recent rise in business sentiment may give a little boost to oil imports in the next few months (see Why oil shipping stocks don’t really follow Japanese activity anymore), but several manufacturers (such as Toyota and Honda) have moved their plants to China to meet the country’s growing demand. Because of this move, oil imports to Japan are unlikely to affect shipping rates significantly. While India recovered from a recession in 2008, its outlook has been bleak and will likely stay that way for now due to high inflation.

China GDP and Crude Oil Import 2013-07-09Enlarge Graph

So, activities in the United States’s energy boom and China’s economic growth have important implications for tanker companies such as Teekay Corp. (TK), Tsakos Energy Navigation Ltd. (TNP), Ship Finance International Ltd. (SFL), Nordic American Tankers Ltd. (NAT), and Teekay Tankers Ltd. (TNK). This impact will also affect the Guggenheim Shipping ETF (SEA). As the chart above shows, high economic growth in China has coincided with high import growth in crude oil since 2005.

This analysis continues in Why China’s financial woe affects oil shipping (tanker) companies (Part 2).