Study forecasts softer tanker market ahead

July 16, 2007
Tanker market earnings for the half-year ended March 2007 were largely unchanged even while market rates eroded as the fleet expanded, leading to forecasts of softer market conditions ahead.

Tanker market earnings for the half-year ended March 2007 were largely unchanged even while market rates eroded as the fleet expanded, leading to forecasts of softer market conditions ahead. Clarkson Research Services Ltd. detailed the reasons behind these market movements as well as offering forecasts of future market direction in its Spring 2007 “Shipping Market Outlook: A Half-Yearly Review of the Shipping Market.”

According to Clarkson data, the tanker market, comprised of both modern and early 1990s VLCCs, modern Suezmax, modern Aframax, and both dirty and clean products carriers, averaged $34,025/day in earnings from September 2006 to March 2007, a 0.1% increase from the $33,984/day seen March-September 2006. A 24.8% increase in Aframax earnings, to $44,060/day, helped offset a more than 16% drop in VLCC earnings, which fell to $53,172 and $49,452/day for modern and early 1990s vessels, respectively (Table 1).

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Tanker rates also remained relatively strong, according to Clarkson, despite erosion seen over September-March, the only category to fall below the 1997-2006 10-year average being Suezmax spot rates.

As of Mar. 1, 2007, the tanker fleet of more than 10,000 deadweight-tonnes (dwt) had expanded by 85 vessels, with 161 new vessels delivered and 89 sold for scrap over the preceding 6 months.

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

The interplay of a strong world economy and high oil prices shaped the tanker market for the 6 months ending Mar. 1, 2007, according to Clarkson. It cites the combination of lower-than-expected oil demand growth in 2006 (0.8 million b/d instead of 1.8 million b/d) and the fact that almost half of this growth occurred in non-importing regions such as Russia and the Middle East as having had a particularly bearish effect on the tanker industry.

Crude tankers of all categories lost ground against 10-year average rates over the 6 months, but ship values held up better, with a 5-year old Suezmax tanker actually increasing in value to $82.5 million from $77 million. The spot rate for 30,000-dwt clean product tankers also increased to $31,737/day from $29,171/day in the preceding 6 months. Rates for a 1-year time charter of the same vessel type, however, slipped to $23,500/day from $27,000/day, according to Clarkson.

Clarkson expects non-Middle East and Russian crude trade growth of 1 million b/d in 2007, juxtaposed against a 7.6% increase in the fleet in 2007, to 391.7 million dwt and an additional 8.1% increase in 2008. Either a blacklisting of single-hull tankers or a dramatic fall in rates, however, could limit net tonnage growth by increasing the scrap rate from Clarkson’s baseline of 5 million dwt/year.

Sluggish and unpredictable demand, combined with rapid and predictable supply growth, continue to typify the tanker market, said Clarkson, with the largest variable being the timing of the replacement of the nondouble hull fleet. A rapid disappearance would tighten the market considerably, while a lingering phaseout will only add to the pressures created by general market conditions.


On Mar. 1, 2007, the VLCC fleet consisted of 490 vessels of 143.5 million dwt. The orderbook of 177 vessels (54.2 million dwt) is enough to replace all current single-hull VLCCs and still increase the fleet by roughly 10%, according to Clarkson. Orders are forward-loaded, with 11.6 million dwt set for delivery in 2008 and 34.4 million dwt delivered in 2009 and beyond.

Clarkson described VLCC activity as muted during the 6 months ending Mar. 1, 2007, with average earnings for a 1990s-build vessel plunging to $48,389/day, compared to an average of $76,907/day for the same period 1 year earlier. This came despite the uptick seen between end-2006 and March 2007 (Table 2).

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Weakness was also evident in the time-charter market, with 1-year rates for modern tonnage dropping to $51,000/day in February 2007 from a 2-year high of $70,000/day in September.

Clarkson sees the buildup of tonnage in this environment as bearish, with the market already weaker than it was just 2 years ago.


On Mar. 1, 2007, the Suezmax fleet consisted of 353 vessels of 53.2 million dwt. The orderbook of 19.7 million dwt is enough to replace all current single-hull Suezmax tankers and still expand the fleet by 18%, according to Clarkson.

Earnings for the 6 months ending Mar. 1, 2007, averaged $46.702/day, down 23% from the same period a year before. Time-charter rates for 1-year on a modern vessel dropped 13% from September 2006, while 3-year rates fell by 10% to $38,000/day.

Clarkson points to an orderbook that more than doubled between March 2006 and March 2007 and currently comprises 37% of the total fleet as bearish and expects rate behavior in the Suezmax market to mirror that of the VLCC sector.


On Mar. 1, 2007, the Aframax fleet had increased to 72.5 million dwt. The orderbook of 28 million dwt is enough to replace all single hulls in the class and still expand the fleet by 19%, according to Clarkson.

Aframax earnings fell 16% over during the 6 months ending Mar. 1, 2007, to $42, 677/day. Time charter rates were relatively flat at $24,000/day for a 1-year period.

Clarkson sees the combination of a healthy supply and potentially lower demand as likely to lead to short and medium-term softness in the market.


Clarkson ascribed the poor performance of the product tanker market for the 6 months ending Mar. 1, 2007, to above-normal temperatures in the northern hemisphere that dampened seasonal fuel consumption. Average earnings for dirty products carriers slipped 27% year-on-year to $31,505/day, with an even larger drop of 36%, to $24,979/day, seen in the clean market.

Even so, rates for both clean and dirty product tankers remained above 10-year averages, despite the $17,957/day fetched by clean products tankers in November 2006 ranking as the lowest monthly average recorded by Clarkson since fourth-quarter 2003.

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On Mar. 1, 2007, the 10,000-80,000 dwt product tanker market stood at 97.5 million dwt, a 2.2% increase. With Clarkson expecting deliveries of 10.4 million dwt and demolition of 2.2 dwt, the product fleet is set to grow by 12% in 2007 (Figs. 1-2).

Clarkson, however, expects product-fleet expansion to accelerate to still higher levels. The current orderbook for 10,000-80,000 dwt vessels stands at 43.6 million dwt leading to what Clarkson describes as an astonishing 30% year-on-year expansion of the fleet once demolition is taken into account.

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Clarkson sees the petroleum products tanker market as particularly exposed to the general weakening seen in the broader tanker market, the huge orderbook outweighing strong demand for products (led by China and India) and creating a structural weakness in the fleet which will mandate “significant demolition activity” for the sector to regain health.


The end of 2006 saw spot freight rates for most chemical tankers routes standing well above 2005 levels, according to Clarkson. Rates for 5,000 tonnes Houston-Rotterdam rose 77%, with Houston-Far East rates increasing 32%. Rates from the Persian Gulf to the Far East for 15,000 tonnes rose 13%.

Rotterdam-US gulf rates fell 17% (5,000 tonnes). Clarkson ascribed both this and the increases seen ex-US gulf to the return of petrochemical production in the region following the hurricanes of 2005.

As with the other tanker segments, Clarkson sees fleet growth in chemicals outweighing demand growth, leading to potential declines in freight rates for the balance of 2007. It tempers this forecast, however, by noting increased Middle Eastern production, the growing demand for biofuels, and more stringent carriage regulations, all of which could have a bullish effect on the market.


Clarkson described the 6 months ending Mar. 1, 2007, as relatively quiet for the LNG carrier market, as the capacity expansions planned across the supply chain over the past 4 years began to come to fruition. Six vessels comprising 1.32 million cu m were ordered in the final 4 months of 2006, bringing the totals for the year to 36 orders and 6.93 million cu m. Nine orders of 2.07 million cu m were made in the first 2 months of 2007, according to Clarkson, bringing the total orderbook as of Mar. 1 to 145 vessels and 24.9 million cu m.

Qatar Gas Transport Co., according to Clarkson, placed the orders seen during the first 2 months of 2007, completing its newbuilding program and removing the biggest single purchaser in the recent LNG newbuild surge.

Charter rates at the end of 2006 were strong ($53,800-62,250/day), boosted at least in part by the tying up of multiple vessels for use as floating storage. A total of 17 different vessels were used as storage for at least part of the 6 months ending Mar. 1, 2007, according to Clarkson, as companies such as BG Group, Shell, Excelerate, Suez, and Kogas became more active in the arbitrage between spring and winter markets.

As these vessels become available, however, and newbuilds are added to the fleet, some in the market are predicting a downward trend, according to Clarkson. Clarkson says that the degree to which this is true depends a great deal on the timing of new LNG production capacity, with delays leading to an oversupply in the shipping market but the outlook becoming more positive if current project schedules are maintained.