Storm clouds persist for oil-tanker owners
A collapse in day rates for the world's fleet of crude carriers will be exacerbated this year as a large number of new vessels hits the market
Oil tanker owners face another tough year. With day rates sinking to new lows in the first weeks of 2011, a modest increase in demand forecast for the coming months is unlikely to offset the dampening effect of new tonnage coming on to the market.
The average day rate for very large crude carriers (VLCCs) on the benchmark long-haul route from the Middle East to Japan sank to around $18,500 in December – the lowest December figure for at least a decade – and continued to slide to below $15,000 a day in mid-January. Even the $31,500/d average for 2010 as a whole was a far cry from the heady days of 2008, when owners could expect to receive $85,000/d for VLCCs (see Figure 1).
"Despite the increase in tanker demand we see from this year, as world oil demand picks up, the increase in vessel supply means we still have a fundamentally weak market in 2011," says Steve Christy, research director at EA Gibson, a shipbroker.
Following a golden age for tanker owners in 2004-08, as the global economy expanded and oil demand grew, oil producers and exporters have increasingly gained the upper hand in price discussions with tanker owners, as the global recession started to seriously dent demand in second-quarter 2009.
To exacerbate matters, given the long lead-time between placing an order and finishing a vessel, many of the very expensive tankers ordered during the good times have been launched only in the past few months – under very different trading conditions. And with more on the way, over-supply of vessels is set to continue for much of 2011.
It probably will not be until 2012, or beyond, that the situation starts to even out, as higher demand and falling levels of new vessel supply wipe out excess capacity, prompting a rise in tanker rates.
In 2009 and the first half of 2010, the combination of a contango in the oil market and low day rates did provide some support for tanker owners, as oil companies sought to use tankers as floating storage. The period of contango – when forward prices exceed spot prices – made it desirable for producers to store oil until the prompt market picked up. Low tanker rates made floating storage as cheap, or cheaper, than onshore capacity.
But that contango has been steadily unwinding, removing support for tanker rates. The main influences were a faster-than-expected increase in world oil demand around mid-2010 and, at the same time, an increase in new onshore storage capacity (PE 12/10 p18).
According to Oslo-based shipbroker RS Platou, 25-30 VLCCs – some 5% of the total VLCC fleet – returned to active trading in the space of just a few weeks. And, to add insult to injury for owners, the offloading of oil from floating storage helped reduce US and Chinese crude imports by more than 10% in terms of tonne-miles.
The usual uptick in demand during the northern hemisphere winter also failed to make much of an impact. By the end of December, the number of tankers being used for floating storage had slumped to the lowest level since February 2009 – 43 vessels compared with 50 at the end of November. That trend contributed to a very uneven price picture throughout the year. Demand for floating storage pushed VLCC rates up to around $50,000/d in the first half of the year, before the slide to end-of-year lows.
In an end-of-year note, Erik Andersen, of RS Platou's economic research department, outlined the problem for owners over the coming year: "Even based on the International Energy Agency's [IEA] rather sober oil-demand forecasts [PE 12/10 p26], we estimate a relatively high tonne-mile growth of 4-5% from 2010 to 2011. A more bullish oil market could add a few percentage points to this. Since we cannot see any rebuilding of floating storage, it is difficult to assume a total tonnage demand growth at the same 7-8% level as the expected fleet growth. This means lower utilisation rates and weaker market conditions."
Through much of the second half of 2010, it was near impossible for tanker owners to garner rates on the spot market that would allow them to break even. In November, Frontline said that in order to break even in fourth-quarter 2010, it needed to achieve a rate of $31,300/d for VLCCs – well above the level prevalent for much of that quarter and at the start of 2011.
So, with the floating storage option diminishing, some tanker owners have been pushing hard to charter-out tankers for longer periods to at least guarantee some cash flow. Frontline decided to switch from its policy of putting most of its fleet out on the spot market in mid-2010 and looked more to the charter market instead.
But persuading oil producers to charter vessels they can acquire cheaply in the spot market is easier said than done. "There has been a renewed interest among some owners in putting tonnage out on time charter, but there can be a big gap between the price the owner wants and what the charter is willing to pay," says EA Gibson's Christy.
Prices in the medium range (MR) oil-products tanker market should recover a little faster than those for crude carriers, largely because lower investment in MR vessels during the early part of the global downturn means there is less over-capacity in the sector.
"Floating storage helped VLCCs and Suezmax, but it didn't help the MR market. That means there has been very little investment in products tankers since the recession hit," says Christy. But even here, a noticeable pick-up in the market is not expected before 2012.
The gloomy prognosis has led to across-the-board downgrades for tanker company earnings. In December, RS Platou cut profit forecasts for tankers in 2011 and 2012 by up to 55%. But while many tanker companies have made losses or struggled to break even, there have been few corporate collapses in the sector during the recession – a factor attributable in part to the support provided by financial institutions underwriting company spending.
Banks have generally taken the view that it is better to maintain support for shipping firms until business picks up. That is partly because they believe more profitable times lie ahead, as and when the global economy rebounds, but also because pulling the plug on an ailing firm could leave a bank as the de facto owner of a fleet of tankers in a depressed market.
The weak tanker market has also provided opportunities for some of the larger, more liquid players, which have been able to purchase vessels at a substantial discount to the peaks seen before the downturn. In August 2008, a five-year old VLCC could cost more than $150m. By late 2010, the cost had dropped to around $100m.
Nonetheless, some big fleet operators believe economic expansion in Asia will drive a recovery in the tanker market and are putting their money where their mouths are. In January, Greece-based DryShips said it planned to buy 12 tankers from a South Korean yard for $0.77bn. Six of the vessels will be Suezmax tankers, which carry 0.88m-1.46m barrels of oil, while the other six will be 0.55m-0.88m barrel Aframax vessels. The ships will be delivered between 2011 and 2013.
DryShips' chief executive, George Economou, issued a bullish statement on the order: "While the tanker market is experiencing low freight rates, we believe that, in the medium-to-long-term, strong oil-demand growth, [particularly from] China and India, will lead to substantially improved market conditions."
Crucial to the pace of recovery in all tanker markets is oil-demand growth – and there are signs of hope. China and India are both increasing domestic refining capacity, providing fast-growing markets for crude.
Meanwhile, the IEA has been steadily raising its forecast for 2011 oil demand in recent months, largely on the back of an improved outlook for the Chinese and US economies. In December, it forecast global oil demand would average 88.8m b/d in 2011, up from 87.4m b/d in 2010. Nearly a third of that demand will come from the Asia-Pacific region, with Chinese growth providing the main impetus.
Preliminary data showed Chinese oil demand rose by 12.6% in October compared with the same period in 2009, double the pace of the previous month, while analysts expect Chinese oil imports in 2010 as a whole to have jumped by some 20%.
Chinese demand growth is likely to be more restrained this year – possibly less than 7%. But this, and growth elsewhere in Asia, together with rising exports of oil products from China should still ensure the long-haul routes east of the Suez Canal provide the bulk of any uptick in activity in coming months, as Asia draws in crude from the Middle East, west Africa, Brazil and elsewhere.