Analyst says oil tanker market to slump in 2002, gas carriers' prospects brighter

By the OGJ Online Staff

HOUSTON, Nov. 26 -- Slumping world economies and increased deliveries of new oil tankers during second half 2001 threaten healthy tanker profit margins for early 2002. The prospects for gas carriers, however, especially those carrying LNG, appear somewhat brighter as 2001 draws to a close.

Clarkson Research Studies in its semiannual Shipping Review & Outlook says the main concern is that "weakening global oil demand and higher short haul output will lead to Organization of Petroleum Exporting Countries cutbacks just as tanker deliveries start to pick up in 2002."

The company's latest review of worldwide shipping goes on to say there has been little activity in tanker demolition and many owners seem "determined to take full advantage of the life extension opportunities offered by MARPOL Regulation 13G" by leaving longer in service tankers that eventually must be scrapped.

For now, "shipyards are buzzing." Deliveries of new vessels in 2001 will reach 49 million dwt, more than three times as much as the industry produced in the late 1980s. Combining with this activity to increase the tonnage available for service, says the study, tanker scrapping is 22% below 2000 levels.

By the end of 2007, the vast majority of old vessels (those built before 1982) will have been retired from the fleet; however, "tanker owners appear to be taking full advantage of this latitude," said Clarkson.

"Record shipbuilding deliveries combined with an economic recession usually mean hard times ahead," the group added. As a result, shipping rates will "take another sizable step down" in the first 6 months of 2002.

In the 6 months through Sept. 30, 2001, covered by the study, tanker earnings fell by 37%, compared with the previous 6 months. Despite this reduction, the 6-month average of $26,777/day was "more than generous," given that most tankers cost less than $8,000/day to operate.

Earnings at this level "left ample surplus cash for capital repayments and a useful margin for profit," the report said.

The driving force behind the tanker market in 2000 was the 4.9% increase in seaborne crude imports, said Clarkson, reflected in substantial growth in the US and Asia. But the market was also helped by the "timing of the US energy crisis which brought a surge of intense import activity, especially in the products tanker market." For a brief period, from fall 2000 through spring 2001, US products imports increased by 1 million b/d.

During 2001, signs have indicated tanker demand is easing. The cutback in Iraqi exports in July-August severely affected the VLCC market and crude oil supply will shrink quite sharply for the year.

Gas carriers
Very large gas carriers (VLGCs) primarily carry propane and butane in cargo lots of 40,000-43,00 tonnes, although some of the newer vessels on order have slightly large capacities.

The sector is served by a fleet of 102 VLGCs with an aggregate capacity of 7.89 million cu m, 57% of the entire LPG fleet by capacity. With 5 vessels already delivered, another 3 scheduled by yearend 2001, and no demolition recorded or anticipated, Clarkson expects fleet growth in 2001 to be about 8%.

The outlook for VLGC demand remains generally optimistic. The East is likely to continue in deficit as LPG demand grows, including China despite its recent slowdown.

Meanwhile, LPG supply is set to expand in the West, though will be mainly lower in the East following increased Saudi Arabian consumption. For several years, Saudi Arabia has been building toward greater domestic consumption of LPG by increasing petrochemical capacity, thus diverting much of its LPG exports.

Supply will expand strongly from Africa (up from 9.5 million metric tonnes in 2000 to 13.5 million metric tonnes by 2005), notably Nigeria, and more steadily from the North Sea (around 0.5 metric tonnes/year).

The LNG market strengthened rapidly in the year through the end of third quarter 2001, says Clarkson, resulting in "unprecedented levels of shipyard activity." Vessel investment hit all-time highs, with the ordering in 2000 of almost 1.5 million cu m of shipping capacity and the biggest order book since the mid-1970s.

The combination of rapidly accelerating demand for energy, especially in the US, and relatively low newbuilding costs, however, has led several owners to order vessels before fixing them on long-term charter. These have been either oil majors, with sufficient LNG interests to guarantee employment for the new vessels or entrepreneurial owners, some of whose new orders remain unfixed.

Although Clarkson says it expects these vessels ultimately to be used within projects, "owners will have the flexibility to operate them profitably spot or short-term before commencement of long-term employment."

New demand should come from Asia, particularly India, China, and Japan, and also from the developed world where LNG is gaining popularity because of its relatively environment-friendly credentials and as a result of power industry deregulation, says the study.

Spot opportunities are no longer as prevalent as they were in 1999, when 8.8% of LNG was traded spot compared to the 5.4% in 2000.

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