Conversion, scrapping keep rates firm as demand erodes

Jan. 19, 2009
Tanker market earnings for the half-year ended September 2008 firmed 43.7%, accelerating the strength seen in the previous 6 months.

Tanker market earnings for the half-year ended September 2008 firmed 43.7%, accelerating the strength seen in the previous 6 months. A combination of large tankers being withdrawn for conversion to offshore structures or bulk carriers and scrapping kept vessel supply constrained even as high crude and product prices chipped away at demand. Clarkson Research Services Ltd. detailed the reasons behind these market movements as well as offered forecasts of future market direction in its Autumn 2008 “Shipping Review and Outlook: A Half-Yearly Review of the Shipping Market.”

According to Clarkson data, the tanker market, consisting of both modern and early-1990s VLCCs, modern Suezmax, modern Aframax, and both dirty and clean products carriers, averaged $49,272/day in earnings from March 2008 to September 2008, a 43.7% increase from the $34,280/day seen September 2007-March 2008. Greater than 65% increases in Suezmax and Aframax earnings, to $86,661/day and $58,535/day respectively, led the upward momentum, with earnings for all segments moving up from the previous 6 months (Table 1).

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Another example of market strength, according to Clarkson, were the January-July 2008 increases seen in VLCC rates, which peaked at more than $169,000/day, compared with the more than $53,000/day spot rate seen in January.

Even with the overall strength of the market, however, Clarkson cited the deepening problems in the global economy and financial sector as reinforcing the idea that the recent bull market was ending.

The conversion of single-hull tankers combined with 3.6 million dwt of scrapping reduced tanker-fleet growth to only 1.5% for the first 9 months of 2008, well below the 4.4% increase forecast for the year (OGJ, June 23, 2008, p. 66). Clarkson has revised its 2008 growth forecast to 4%—to 401.4 million dwt—but notes that this remains stronger than expected and that 59 million dwt of tankers are scheduled to be delivered in 2009.

This article will detail some of the other findings in a few of the numerous vessel categories covered twice each year by Clarkson in its Shipping Market Outlooks.

Market outlook

Surging oil prices encouraged importers to lift their oil earlier than usual, fueling strength in the tanker market despite steady demand erosion, according to Clarkson. Clarkson said that spot earnings improved across most major sectors, though not as rapidly as in the previous 6 months. The average clean products spot rate increased 64%. Suezmax spot rates slipped 1% from the previous 6 months, but remained 27% above their 10-year average.

Crude tankers of all other categories gained ground against 10-year average spot rates over the past 6 months. The spot rate for 30,000 dwt clean product tankers also increased to $36,023/day from $20,689/day in the preceding 6 months. Rates for a 1-year time-charter of the same vessel type, however, rose just 5%, to $23,000/day, according to Clarkson.

Ship values for all segments but clean products continued to increase, with the value of 5-year old Aframax vessels reaching $79 million from $70 million in March 2008. Clean product tanker values (30,000 dwt) were unchanged at $47 million.

VLCC

By Sep. 1, 2008, the VLCC fleet totalled 147.6 million dwt, down from 148.3 million dwt 8 months earlier as single-hulled vessels continued to be converted to floating, production, storage, and offloading vessels and very large ore carriers (Fig. 1, Table 2). A total of 76.8 million dwt of VLCCs is forecast to be delivered by yearend 2011, creating a supply surplus shortly after the strict 2010 phaseout of single-hulled vessels. The fleet order book increased 44.5% during the first 8 months of 2008, with a more than 300% increase in contracting for new vessels.

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Clarkson described the VLCC sector as tumultuous for the 6 months ending Sept. 1, 2008, with spot earnings for 1990s-build vessels falling from $164,232/day at the end of July to $29,420/day by Aug. 22. For the entire 6 months, however, spot earnings averaged $104,621/day, compared with $79,262/day for the previous 6 months.

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The time charter market also firmed, with 1-year rates for 1990s-build tonnage reaching $62,500/day by September 2008 compared with $52,500/day at end-2007.

Clarkson noted that then-high oil prices and the continued economic instability of the OECD all but wiped out OECD demand growth during the first 9 months of 2008 and that continued demand from China and India during the period propped up the VLCC market. It expected that large refineries coming online in Jamnagar, India, and Huizhou, China, would continue to support the VLCC market.

Clarkson anticipated short-term strength fuelled by heating and fuel oil demand during the northern hemisphere winter but predicted the looming order book would dwarf the phaseout of single-hulled vessels in the medium term. Further forward, market sentiment remained positive as owners anticipated a growth in tonne-miles would boost demand.

Suezmax

On Sept. 1, 2008, the Suezmax fleet totaled 54.8 million dwt, flat for the 6 months as conversions and scrapping matched 1.4 million dwt of deliveries. A heavy delivery schedule, particularly in 2009, will see the fleet reach 62.7 million dwt by the end of that year, according to Clarkson.

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Spot earnings for modern vessels peaked July 25 at $153,088/day, the highest rate ever recorded. By Sept. 1, however, earnings had slipped to $57,247/day. Even with the spot softening, time-charter rates for 1-year on a modern vessel firmed 12.9% from the end of 2007 to $35,000/day. Rates for modern vessels only showed a similar pattern to the overall Suezmax class, with average spot earnings and 1-year time charter rates converging (Fig. 2).

Clarkson expects spot rates in the Suezmax sector to remain steady in the short term, while noting that ongoing unrest in Nigeria could soften demand. In the medium term, however, rates may come under pressure as potential vessel oversupply emerges. Increased production from non-Nigerian West Africa and the former Soviet Union, however, could absorb some of this oversupply, according to Clarkson.

Aframax

On Sept. 1, 2008, the Aframax fleet had increased to 78.2 million dwt. Another 4.8 million dwt scheduled for delivery over the balance of 2008, only partially offset by demolitions and conversions, will grow the fleet to 81.9 million dwt by yearend 2008, according to Clarkson.

Aframax earnings ended 2007 at $56,560/day and slipped over the next 8 months to $41,730/day, averaging $52,096/day for the period. Unlike the other crude-carrier classes, time charter rates also slipped 2.3% over the first 8 months of 2008, reaching $22,500/day for a 1-year term.

Clarkson sees the relatively smaller order book in the Aframax sector possessing less potential for medium-term oversupply than is expected for VLCC and Suezmax vessels. Clarkson also described declining North Sea production over the next 5 years as bullish for Aframax’s as European import demand looked to longer-haul supply sources.

Products

Clarkson reports strong earnings in the products market during the 6 months ending Sept. 1, 2008. Spot earnings for clean product tankers averaged $30,779/day, up from $27,961/day for the year-earlier period. Dirty carriers averaged $43,699/day. Clarkson ascribed the strength in earnings to a combination of pre-Olympic stock building in China and extra hurricane-related demand on the US Gulf Coast.

On Sept. 1, 2008, the 10,000- 60,000 dwt product tanker market stood at 85.9 million dwt. Clarkson expects the fleet to reach 91.8 million dwt by end-2008 and 102.4 million dwt by end-2009, a 26% increase on the end-2007 fleet.

This growth in the fleet could lead to tonnage oversupply. Combined with uncertain demand growth, Clarkson expects that rates could come under pressure.

Chemical

Sept. 1, 2008, saw spot freight rates moving up across the chemical segment from yearend 2007, according to Clarkson. Rates for 15,000 tonnes Persian Gulf-Far East rose 21.8%, with Houston to Rotterdam for 5,000 tonnes rising 23%.

Persian Gulf-Mediterranean rates showed the sharpest increase, rising 41.3% (15,000 tonnes). Healthy demand allowed ship owners to pass rising bunker costs on to charterers. Crew costs also continued to rise as the qualified pool shrank.

As with the other tanker segments, Clarkson sees heavy ordering in recent years as creating a potential oversupply unless the credit crisis affects the owners’ ability to finance newbuilds. Buoyant biofuels markets and expanded Middle East production tempered bearish sentiment in the chemicals segment.

LNG

Clarkson described the LNG segment as depressed by uncertainty regarding potential completion dates of several liquefaction and regasification projects. New contracting for LNG carriers depends more heavily on the shipment needs of particular projects than other tanker segments, with the spot market for LNG vessels typically limited.

In the first 8 months of 2008, 30 vessels totaling 5.27 million cu m were delivered to the fleet, the average size being 155,735 cu m. This new tonnage, combined with production delays, had about 70 vessels available on the spot market as of Sept. 1, 2008, depressing charter rates accordingly. In total, 31 vessels were scheduled for delivery in the last 4 months of 2008, 45 in 2009, and 21 in 2010, but only five new vessels were contracted in the first 8 months of 2008.

Prospects for major growth longer term, according to Clarkson, continue to depend on the success of Russian and Iranian development plans. Iran in particular, says Clarkson, could stimulate demand if all of its plans come to fruition.

Failure to approve new projects and on-schedule vessel delivery, however, could extend the current rate softness forward, according to Clarkson.