Will the 2012 tanker market be better than 2011? Report Jan 5By james tweed • Jan 5th, 2012 • Category: Tankers
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Happy New Year and thank you for downloading the Tanker Market report podcast from Coracle and Braemar Seascope for January 5th 2012. This report will look at the VLCC, Suezmax and clean products markets.
If we look back on 2011, shipowners will have to admit that it has been one of the worst years in recent history. Our figures are only really a yard-stick, but for the roundtrip TD3 route, AG – Japan, the average Timecharter Equivalent earnings come out at around $8,000/day. With operating costs in excess of US$10,000/day, it is easy to understand why even publicly listed companies have gone bankrupt. The highest earnings of the year were booked mid-February at $45,000/day with the nadir in October when some fixtures would have resulted in negative earnings, but for reduced ballast and laden speeds. Triangulation, AG/US Gulf followed by Caribs/China can increase earnings by about another 30% if an owner is lucky and he is able to fix without too much waiting. The root of the problem is the vast shipbuilding programme from China in its quest for domestically controlled energy supply. Over the last five years, we have seen the Chinese controlled VLCC fleet expand from a few ships to a large armada: COSCO 22 VLCCs, Nanjing tankers 13, China Shipping 14, AMCL 10, HOSCO 5, Glasford 4. So a total of 78 modern VLCCs now trade AG and W Africa to China on various COAs, spot fixtures and “special relationships”, all of which keep the industrial might of China Inc. running. Unfortunately, independent VLCC owners neglected to take this vast expansion of the fleet into account. They correctly predicted the increase in volumes of crude oil being lifted from the AG to go to China, though they did not take into account that this would be taken mostly on a brand new domestically built and controlled fleet. 2011 has been the year in which the oversupply situation became a reality. The Chinese have strategically succeeded in delivering the life-blood of their industry, but it has been at the cost of the VLCC market. As we stand today, the shipowners who got it wrong currently own too many expensive ships, which are running at a loss. The ones who got it right sold out at higher prices a few years back, are now probably operating smaller older fleets, and are circling like vultures for someone in distress. We are seeing the first public companies facing serious financial difficulties, but these are only the early stages – private investors are also feeling similar pain. Second hand prices are holding up for the moment because investors are unwilling to realise their losses. Losing $3,000/day on a $100 million investment can only go on for a finite amount of time, but when the alternative is to lose $30m and sell out in one hit, it’s a very difficult situation. Owners have responded by trying to consolidate the fleet. 2012 will see the birth of the third VLCC pool. It remains to be seen if this can improve the freight markets.
This is a rather confusing time of year as we continue to trade on 2011 Worldscale rates, however for market assessment and this report we are using the new 2012 rates. It seems that with co-operation from the US, the EU has now decided that there is a possible way to ban the importation of Iranian oil. The 450,000 bbls/day which Europe currently imports will certainly find a home in the Far East, however with another market closed to them, Eastern buyers will be able to exert more pressure on the price. Iran has responded with some sabre-rattling, threatening to close the Straits of Hormuz, but this would result in a huge escalation of hostilities. The US secretary of defence has already said that, “Disruption to the flow of oil through Strait of Hormuz would threaten regional and global economic growth. Any attempt by Iran to do this would be illegal and unsuccessful.” The VLCC market has responded positively over the holiday period and rates to the East are now 265 at 62.5 (based on 2011 Worldscale). AG/West is steady at around 280 at 39. West Africa has seen a few fixtures reported. The last done for 260 W Africa/US Gulf was at world scale 65 on the 2012 scale and East at 60 on the 2011 scale. Just to confuse matters, both were fixed off end Jan laycans! Meanwhile, a cargo in the Med was fixed/failed for Ceyhan/USG 270 at 72.5 off end/Jan which was quite a high rate because most of the ships in the North Sea area had already been fixed to carry fuel oil to Singapore at the $4m level.
The 30 day availability index shows 68 VLCCs arriving at Fujairah, only 7 of which are over 15 years old, compared to a pre-Christmas total of 36 VLCCs. So far for the month of Jan 2012, we have seen a total of 98 cargoes covered. With the freight rate for 280 AG/US Gulf at 39 and bunkers up $44 a tonne since our last report to $721 earnings are minus $5,250 a day. This compares with 270 AG/East at 62.5 and returning owners nearly $21,000/day.
Now we look at the Suezmaxes and as is the case every year, confusion reigned in the first week back after the Christmas break. With shipping professionals recovering from their holiday hangovers, there was a slow start to this week. Over the Christmas period, West Africa suezmaxes continued to fix and rates continued to rise. Worldscale 99.5 was achieved a number of times by owners for West Africa/UK Cont-Med and this confidence carried on into the new year. As Worldscale rates switched onto the new scale, there was the obvious correction, however at the beginning of this week there was a good level of confidence amongst the owners. As the week moved forward any cargo that quoted received 4 or 5 offers, but there didn’t look to be any weak links for the charterers to exploit in the market. After some patience, one particular charterer managed to break the sentiment and fixed W Africa/UK Cont-Med at 85 on the new scale, which is equivalent to approximately 100 on the old scale. This single fixture took the confidence out of the market and this led to the remaining owners following close behind, setting the market at 80. This was seen as a slightly disappointing start to the year.
This story was mirrored in the Med and Black Sea market. Over the holiday period the fixing continued and the owners managed to push the rates up to 130 which, apart from a brief spike in November, were the highest rates seen in 2011. Moving into the early part of this week, the Dardanelles was closed and the delays had increased to ten days northbound, putting a bit of further pressure on the list. With the amount of cargoes left to cover in January and the shortening list, one could have expected the rates to kick-on a little further. However, owners seemed to make the decision that 130 was as good as it was going to get and they started trying to lock in these numbers. With the popularity of the Black Sea and the change to 2012 flat rates, the Black Sea rates quickly dropped. Moving to next week there are still a few cargoes left to cover from the Black Sea and we are seeing good levels of fresh Med cargoes in play. With the delays, this should lead to an increase in rates, although recent history tells us that the rates will remain static.
In terms of the clean markets, the LR2 market is operating on two separate levels at the moment, the parameters of which are based on geography. East of Suez enquiry has been very low this week. The distillates market has been quiet out of the Far East, however S.Oil targeted a newbuilding aframax ex-yard at cheap levels for a gasoil backhaul cargo S Korea to Singapore. Reliance quoted the market with some gasoline barrels off 20-25 Jan which will end up in the US, but they are yet to find a ship to cover these with. Despite these low levels of activity, rates are remaining stable for now, in part due to the high levels of activityin the West, which will reduce the number of ballasting vessels from the Med. Naphtha enquiry has remained quiet, but we expect this to pick up as February tenders start to be awarded next week. In comparison, the West of Suez market has been very busy with up to 8 cargoes being worked from the Med or UK Cont, which by anyone’s scale is rather high on the LR2s. Some punchy numbers were being banded around for naphtha to go east, and with a number of outstanding cargoes and not many ships, these rates could firm even further.
On the Continent, the return to the fray after the Christmas & New Year period has bought significantly increased flat rates reflecting the high bunker prices of last year causing a drop in the Worldscale multiplier. This has been further exacerbated this week, by three main factors; tonnage fixed over here from the states in mid-December is starting to work through ports on the Continent and show prompt and early positions; with everyone back at work charterers are under absolutely no pressure to take forward coverage and are reverting to running cargoes on a much prompter basis, and although this year’s Worldscale contains a much higher bunker element, bunkers are spiralling ever higher, reflecting the geopolitical concern behind rising oil prices. Bunkers in Rotterdam have risen $46/tonne this week.
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