Tankers in deep water as hire rates stay low
Hire-rates for large tankers have been desperately low for four years and in the past two have barely covered direct operating costs
Tanker owners are accustomed to business swings. In an efficient market, supported by good data, any surpluses or shortages of capacity can have a disproportionate impact on charter rates. But, after four years of a strong hirers' market, they are saying the business is no longer sustainable.
Over 2012 the owner of a tanker of very large crude carrier (VLCC) size received an average of $20,000 a day on time-charter, according to the Oslo-based shipbrokers, R S Platou. The figure - the average of a wide range, because the VLCC category is defined as tankers of 160,000-320,000 deadweight tonnes (dwt) - was an improvement on the $15,000 day-rate of 2011, but well below the $35,000 of 2010 and the $28,000 of 2009. The last good year was 2008, when the day-rate averaged $88,000.
Yet a VLCC, holding up to 2 million barrels of crude, uses 25-100 tonnes a day of bunker fuel, depending on its size within the VLCC range, speed and whether it is loaded or unloaded - at a daily cost of $15,000-60,000, which accounts for 70% or more of the day-rate. It will have a crew of about 30, and could have cost $100m or more to build. Tanker owners say reinvestment is not supported by recent day-rates, threatening future availability of capacity.
Although - because of the slack growth in world oil demand in recent years -demand for tankers has been flat, the industry's statistics say the market imbalance is supply-side. For many years the world tanker fleet has been increasing in capacity year-on-year: in early 2003 the world fleet of tankers of all sizes totalled 270.7m dwt but 10 years later it has grown to 456.4m dwt. Average annual growth in world tanker capacity over the 10 years was more than 5%, while growth in oil demand was averaging less than 1.5% a year.
Reflecting investment decisions taken several years ago, the fleet is continuing to grow. According to Platou, there are 41 new VLCCs with a combined capacity of 13m dwt due for delivery in 2013, and another 14 due next year and onwards. In 2012, deliveries of VLCCs less scrappages increased the world's VLCC capacity by another 6.5%.
One reason for the growth in capacity was the phase-out of single-hull tankers, which was accelerated under measures agreed by the International Maritime Organisation in 2001 and subsequently - although some single-hull vessels are allowed to operate until 2015. In the peak replacement year, 2006, new orders totalling 74.7m dwt of tankers were placed - equivalent to 24% of the world tanker fleet at that time. Given the requirement to scrap and re-build, many owners took the opportunity to order larger vessels.
Boom or bust
But, in the boom-or-bust tanker business, the key to success can be ordering vessels in bad times in readiness for an upturn to come. The industry's analysts trace an interplay of factors behind tanker ordering: as well as the foreseen demand for tanker capacity some years ahead, important considerations are the cost of building new vessels, prices in the second-hand market, and prices in the scrapping market - which generally, but not always, are related to the price of steel.
For a large part of the period in which replacement double-hull VLCCs were being built, construction costs were rising. A typical VLCC could have been built for $65m in the early-2000s, but by mid-2008 - just before the worldwide recession started - the price had escalated to $160m. The price then declined sharply to under $100m in 2009 and, after a brief recovery, has continued to trend downwards - a VLCC can now be built for $90m.
Unsurprisingly, prices for second-hand VLCCs have also been declining since 2008 - to the point at which a five-year-old VLCC is now worth little more than 65% of its new-build price. While a five-year-old VLCC could have sold for $160m in 2008, the same vessel attracts only about $60m now.
However, over much of the same period, scrap values for VLCCs were trending upwards, and showing strength even against the price of new steel. According to industry sources, declining second-hand prices and rising scrap values almost collided in the early months of 2012, when a 15-year-old VLCC - well short of its typical 25 years life - was worth only about $23m if sold second-hand but nearly $20m if sold for scrap.
The rise in scrap value persuaded some owners to demolish last year, with at least eight VLCCs meeting their fate in the scrapyards of India and China. However, as the world tanker fleet is relatively young, with an average age of just over eight years, the capacity removed was not sufficient to correct the over-supply - and scrap values have declined recently, so the incentive to scrap has been reduced. With demolition values being quoted at about $420/t, and a VLCC typically being made up of 40,000 t of steel, the scrap value of a vessel now stands at just under $17m.
Short of scrapping and laying-up, tanker owners have just one mechanism to correct the surplus of capacity: slow-steaming. They are making use of it, with a recent Platou study showing that the average speed for loaded and unloaded VLCCs declined from 14.0 knots in early-2011 to 12.5 knots early last year.
While reducing speed saves bunker fuel for the tanker-owner, it increases the cost of the journey for the cargo-owner - with financing and insurance costs rising, as well as chartering costs. Although the two parties' positions are opposed, according to Platou there is now an acceptance by many charterers of the need for lower speeds. "Charterers have become more pragmatic and most now seem to accept 13 knots", the company says - in contrast to some years ago, when contracts demanded full speed of 15-16 knots for the loaded journey.
Meanwhile, tanker owners are not optimistic for demand-side improvements coming to their aid. Crude-oil imports by the US, the world's largest oil importer, peaked in 2005 and over the first nine months of last year averaged 8.7m barrels a day - a figure last seen in 1999. With forecasts of rising US production of crude and gas, as well as the increasing use of biofuels and slow growth in consumption, US imports seem set to continue their decline. According to the Energy Information Administration's early-release Annual Energy Outlook 2013, published in December, the decline in US imports will continue until 2019.
But while growth in world crude trade has slowed, the trade in refined products is on an upward trend. Historically, crude was moved to refineries in consuming countries and the refined products were distributed over relatively short distances, but recent years have seen a steady increase in the long-distance trade in products. The new refineries of Asia and the Middle East are sending distillates to Europe, Europe supplies fuel oil to Asia and gasoline to Africa, while the US is a growing exporter to South America.
Accordingly, demand for products tankers has been increasing - although so has supply. While the world fleet of smaller medium range tankers - designated MR1, of 25,000-40,000 dwt - has shown only slight growth in recent years, the fleet of larger MR2 vessels, of 40,000-55,000 dwt capacity, has increased from 344 ships in 2000 to 1,174 by last year. The MR2 fleet is now nearly twice the size of the MR1 fleet, giving a large increase in total capacity.
Because of the increase, charter rates for products tankers have been unsatisfactory for their owners - although they have shown a substantial rise in recent months. According to Platou's data, the average day-rate for MR vessels was $20,200 in November, up from little more than $12,000 in the previous months of the year and $11,100 averaged over 2011. The November figure was the highest average since November 2008.
However, although fundamentals have improved and the products fleet's utilisation rate has increased, shipping authorities are not yet willing to talk of a sea change in the market. A possible explanation for the November upturn is a market response to increased chartering activity for US east coast trades, following Hurricane Sandy of the previous month.
The one strong sector of the hydrocarbons shipping business is the provision of liquefied natural gas (LNG) carriers. While charter rates for crude and products tankers were plummeting in the late months of 2008, day-rates for LNG carriers stayed relatively stable. After cycling between about $25,000 and $45,000 in 2008 and 2009, rates set off on a heady climb in 2010, which took them to a peak of $150,000 in September 2012.
Charter rates averaged $141,000 a day over the first 11 months of 2012, up from the previous year's average of $92,000, according to Platou's data for a carrier of 155,000 cubic metres (cm) capacity - the workhorse of the world's LNG fleet. After the September peak, October and November saw declines to $130,000 and $115,000 respectively.
Although the rise in charter rates was driven by Japan's increased imports of LNG after the March 2011 tsunami, which led to the shutdown of its nuclear power plants, there is evidence that the market was becoming tighter before that. World LNG trade has been increasing - from 300.6bn cm exported and imported in 2010 to 330.8bn cm in 2011, according to the BP Statistical Review of World Energy.
In addition to the higher volumes, demand for LNG carrier capacity has been raised by increased deliveries on long-haul routes -particularly from the Middle East, where Qatari LNG output was 35% greater in 2011 than in 2010. Yet capacity of the world's fleet of LNG carriers was virtually static in 2012, with two new vessels launched and three small carriers taken out of use.
A surge of new capacity is under construction, however. The world's fleet of 374 LNG carriers is due to increase by 21 new deliveries this year and another 62 in 2014 and subsequently, less any scrappages. The deliveries represent an increase over existing capacity of 6.1% this year and nearly 25% in total. Accordingly, there are forecasts that supply and demand will become more balanced by 2014, although charter rates are seen as staying attractive.