The supertanker market will face a drop in ton-mile demand when the 440,000 b/d Myanmar-China crude oil pipeline starts operations in June, inflicting more pain on a sector saddled by chronic tonnage glut and lower earnings, shipping analysts and energy experts say.

The 771 kilometer (479 mile) pipeline from Kyauk Phyu on Myanmar's Yanbye Island to Kunming in Yunnan province will shorten the time to move Middle Eastern, West African and Caribbean crude to China by eight days and limit its overeliance on the congested Malacca Strait and disputed South China Sea.

The $1.5 billion pipeline, operated by China National Petroleum Corporation, or CNPC, will cut into the ton-mile demand growth of the Very Large Crude Carrier market during the second half of this year, ICAP Shipping's Simon Newman said in a recent research note.

The pipeline is expected to move 22 million mt/year of crude into Yunnan province, CNPC said on its website. It will feed refineries such as the 200,000 b/d Kunming plant that is due to be completed by year end.

"We estimate that delivering crude to the pipeline cuts 2,561 nautical miles off a voyage basis discharge in Ningbo. At full capacity this corresponds to a cut of 56 billion ton-miles, or 3% of the Chinese ton-mile demand in 2012," Newman wrote in the report.

"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 account for around 7% of China's total crude imports at the expected 2013 level, assuming full capacity is utilized for an entire year, which is unlikely, said Kang Wu, Senior Adviser at FACTS Global Energy. "The share will go down every year as China's crude oil imports increase," he added.

This was echoed by Newman, who said the incremental import demand would exceed that of the pipeline's full capacity. "So there is still significant upside for ton-miles in 2013, especially with more crude now being sourced from the Atlantic," Newman said in the research note.

Commodity analyst Gabe Collins said a big factor is how quickly growth in light sweet crude production in the US displaces its imports of Nigerian and Angolan crude, which may be diverted to Asia on VLCCs. US Energy Information Administration data showed US crude output rose to 7.03 million b/d in December, up more than 1.1 million b/d year on year.

Because of the greater distance from Africa, this could offset some of the demand loss from the shorter run to Myanmar, versus taking a tanker all the way to coastal China, said Collins, who manages ChinaSignPost.com and ChinaOilTrader.com.

China's crude imports are projected to rise to 6 million b/d this year, said the International Energy Agency, after averaging 5.43 million b/d in 2012 at a 6.8% annual rate of increase. Chinese annual oil demand growth for 2013 is projected at 4%, with overall apparent demand estimated at 10 million b/d, the IEA said.

"It is safe to assume that around 90% or 540,000 b/d of the estimated year-on-year incremental imports will be sourced by sea," ICAP said. The rest of the incremental barrels would be moved via the expanding Kazakhstan-China pipeline that aims to reach its full 400,000 b/d of capacity by 2014 from the current 240,000 b/d, the ICAP report said.

VLCC OWNERS SEE EARNINGS DECLINE ON TONNAGE GLUT

The shorter trip for tankers carrying crude into the world's top oil importer is worrying VLCC owners, who have seen declining freight earnings since 2010 due to tonnage glut.

Time charter equivalents, the daily earnings on a VLCC from the Persian Gulf to Far East, slid from a daily average of $37,000 in 2010 to $12,000 in 2011 and $16,000 last year, a researcher with a ship broking company said.

The average year-to-date earnings for 2013 is $7,000/day as newly built ships continue to flood the VLCC market. The highest daily earnings in the last five years were recorded in 2008 at $87,000, a broking source said.

Shipbrokers Poten & Partners said the current order book for building VLCCs stands at 83 vessels, about 13.5% of the total global fleet size.

More than 80% of China's crude imports currently flow through the Malacca Strait from the Middle East for a 46-day journey, while the West Africa-China round trip takes 65 days, said a VLCC broker.

"The Myanmar-China oil pipeline will definitely have some impact on the ton-mile voyages. But the volume of the pipeline is only 22 million mt per annum. This is a very small volume compared with China's total demand for crude," said the source at a VLCC ship owning company.

"Still, given the current status of the VLCC market, any reduction on the ton-mile voyages will impact the health of the market."

The pipeline would help save 16 shipping days for a two-way voyage, or eight days per trip. It will upset the ton-mile demand, which denotes demand for long-haul voyages such as from West Africa to China, and is calculated by multiplying the volume of cargo moved in mt by distance traveled in miles.

If there is less demand for long-haul voyages, the ton-miles drop, while shorter voyages mean vessels are taken for a shorter duration and hasten their availability for the next voyage.

But some experts said the pipeline would not have a huge impact on the tanker market given Chinese demand is set to grow with its buoyant economy.

"Pipelines have never really replaced shipping. There are limitations to pipelines as to how much oil you can move through them. The Caspian pipeline or the Baku-Tbilisi-Ceyhan pipelines have not affected shipping. I see pipelines as complementing shipping," a Singapore-based VLCC broker said.

Analysts doubt China's presence in Myanmar would stoke tensions in the Indian Ocean, like disputes over ownership of resource-rich islands and waters in the South China Sea have, or prompt the US to further boost its naval presence in the region.

China's strategy is to improve trade relations with smaller countries in South Asia, which reject the notion that great powers are entitled to exclusive spheres of influence, said Christopher Len, Fellow at the Energy Studies Institute, National University of Singapore. To protect its nationals and assets overseas, China is more likely to fund, train and equip security agencies of host countries than establish permanent military bases, he said.

"Given China's growing reliance on seaborne trade, the Indian Ocean is certainly an important area for the Chinese government. However, I believe Beijing will take a cautious approach when it comes to expanding Chinese naval presence in the Indian Ocean at this stage, as they do not wish to further alarm India and the US," Len added.