Feature: The good news for tanker owners?

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

31 Oct 2010

Tanker owners must have thought the worst was over. With the global economy emerging from recession and upbeat GDP growth figures, they might for a while have believed that they would escape a double dip recession. In fact, tanker owners in most segments are only just understanding how painful the market will be. But curiously this has not stopped them from placing ever more orders. Like the dry bulk sector, the tanker industry was looking for a fourth quarter bounce after a summer in which VLCC and Suezmax rates collapsed to below break-even levels. In fact things have gone from bad to worse and seem unlikely to improve soon.
Analysis from Lorentzen and Stemoco estimates that earnings in these segments are way below break-even - in broad terms between USD 20,000 - 30,000 per day - depending on gearing and operational efficiencies of the ship. Spot rates linger in the mid teens per day on average and in time charter equivalent earnings, the first half of October 2010 put in a performance worse than the comparable period of 2009.
One year ago the Baltic’s average VLCC TCE earnings for the first half of October were USD 5,430 per day - this year the TCE is –USD 2,156 per day. Full fourth quarter 2009 average earnings were USD 14,700 but even with a repeat of the uptick this year, owners would still be far into the red. Unfortunately, past performance is not indicative of future growth.
There is a glimmer of hope in that more meaningful improvements in rates occurred at the beginning of December 2009 so an optimist would say the season is only just getting started. But fourth quarter 2010 has its own challenges that will weigh more heavily than any positive seasonal swing.
L&S’ analysis suggests there are 21 VLCCs due for delivery before the end of the year – a newcomer every fourth day – which must put further downward pressure on rates. There are an estimated 35 single hull VLCCs still trading world-wide and even a swift removal of this tonnage ahead of the MARPOL phase-out deadline at the end of the year would be too little, too late for the supply side.
In terms of demand, even a significant reduction in vessels expected in the Middle East Gulf in the next four weeks will not result in any meaningful shift of pricing power from charterers to owners, as the former have their pick of available tonnage.
Despite relatively stable demand from the Far East, cargoes heading West are fewer and more are needed to increase tonne-mile demand. Unfortunately, the latest OPEC meeting saw output left at the same level - 24.85 million bpd – as it has been since the autumn of 2008. The cartel has provided no boost for vessel earnings and though it will meet again in December, the underlying trend – of short term stagnation and peaking western demand in the long term – is a problematic combination.
Neither is storage likely to increase with the crude futures forward curve lying relatively flat albeit in slight contango. With no price signal from the commodity itself, there seems little chance of a rise in storage in current market conditions. So with Christmas approaching, the fourth quarter looks like bringing little cheer – and although quick turnarounds can never be discounted, L&S says the fundamentals are “pointing to a market in hibernation in the near term”.
But despite this negative picture, owners have hardly held back on ordering new tonnage. In fact as data from Simpson Spence and Young show, levels of tanker ordering in the Suezmax and VLCC segments so far in 2010 imply a total double that ordered in 2009.
While much attention has been on the surge in dry bulk carrier ordering, the revival in tanker contracting has been just as marked despite the dismal trading conditions. Provisional SSY data show that in the first 9 months of 2010, 208 new tankers of 26.1 million DWT were contracted (including ships below 10,000 DWT), with much of this ordering being centred on the Suezmax and VLCC segments.
If such rates persisted to end-year, it would imply overall tanker contracting of some 33.8 million DWT in 2010 - almost double the 17 million DWT in 2009. It would also mean that despite high volumes of new deliveries this year, the total end-2010 tanker orderbook might be only marginally reduced from its very high end-2009 level.
Most of the fresh ordering this year has been centred on crude carriers above 85,000 DWT and assuming a continuation of the trend, data imply that some 37 ships in this size range will be contracted in 2010. That would be a spectacular rebound from 2009 when just eight orders were placed, but still falls short of the average 74 ships per annum ordered between 2000 and 2008.
Ordering of Suezmaxes and VLCCs has soared in 2010, particularly the former. Where just 20 and 24 Suezmax contracts were reported in 2008 and 2009, the first nine months of 2010 saw 54 orders placed. This, says SSY, is the highest rate of new contracting for these ships to occur since 2006.
Some 30 new ships have been delivered into service so far this year and even assuming high rates of completions in the fourth quarter of 2010, the end-of-year orderbook will be higher in net terms than at end-2009. This is potentially a serious concern, because the Suezmax fleet is already very modern, with most ships being double-hulled, so there is very little scope for large-scale removals from this size sector in the near future.
There is a similar warning on VLCC contracts. The 41 orders placed between January and September 2010 compare with 43 ships delivered into service in that period. But barring a major revival in global oil demand and long-haul crude trades, there are serious concerns as to how easily this year’s additions to the orderbook can be absorbed into the trading fleet in the years ahead.
If the downturn is long and hard enough cancellations may take care of some of the orders and lay-ups provide some short term impetus. But there is no reason to believe that demand will pick up next year.
Research by investment bank Oppenheimer & Co recently forecast 2011 average earnings for the VLCC sector of USD 38,000 per day, USD 500 per day less than its full-year estimates for 2010.
And despite an expected increase in world oil demand to 88.2 million barrels per day in 2011, tanker demand at 370 million DWT is some way below average supply at 434 millioin DWT. Its demand prediction of 90.4 million bpd in 2012 creates demand for 394 million DWT of tankers, compared to a fleet of 457 million DWT. And the good news? I’m sorry, I’m afraid there isn’t any.

Source: BIMCO