Tanker market volatility more obvious than ever

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

30 Oct 2011

Tanker owners are having to withstand significant challenges when planning out their chartering strategies, as evidenced by the major highs and lows that the markets can experience within a short period of time. The latest analysis from London-based Gibson

points to this exact issue. Gibson said in its latest weekly report that the latest spike in the Aframax/Suezmax markets prompted by the temporary tightening of the Turkish Straits transit rules shows how quickly freight rates can rise from bust to boom and then ease back again. The industry has witnessed a number of similar spikes this year, both in crude and product tanker markets. However, putting aside this inherent volatility, returns so far in 2011 for all vessel sizes above MRs have been extremely poor, with the VLCC market particularly hard hit.
According to the report of Gibson, “the rapid fleet growth over recent years combined with the ‘loss’ of around 4 million b/d oil demand because of the 2008/09 global recession has led to this situation. However, there has been a lack of new orders for products tankers since the recession started and we are now at the position where fleet expansion for products tankers will be limited over the next few years. Hence the prospects in this sector look more promising. In contrast, there is still a sizeable orderbook for VLCC/Suezmax tonnage and this is a major concern for owners. The anticipated removal of the remaining single hull tankers is unlikely to have any meaningful impact in reducing this oversupply as there are relatively few left and they have virtually no role in the spot market” said Gibson.
It went on to mention that “given this, the only way the VLCC/Suezmax market will get to the same promising position as for products is if demand rises more sharply than forecast or if tanker supply is lower. With any upgrade in forecast demand highly unlikely, it is therefore down to supply. This can come about if not all the current orderbook gets built or if a significant amount of older double hull tonnage is demolished. The cancellation of new orders is an unknown, but we have already seen some double hull vessels being sent to the scrapyard. However, so far this has focussed on MRs and Aframax and not in the Suezmax and VLCC sectors, where owners need it most. In fact, in the last 2 years only 1 double hull VLCC and 4 double hull Suezmax have been scrapped, compared with 67 MR/Panamax/Aframax.
There are currently very few double hull VLCC/Suezmax tankers over 20 years old, but there is a combined 139 (14% of the fleet) more than 15 years old. Although historically this has been considered as ‘too young’ to be sent to the scrapyard, it may be that low earnings coupled with fairly robust scrap prices are the ‘right’ conditions for a more speedy removal of older and/or the least efficient crude tankers. Whether this is a strong enough trigger for owners to scrap is questionable, but other factors may also come in to play, such as legislation on ballast water treatment. If these measures are ratified then there will be the requirement for owners to invest in on-board treatment plants. The economics of this at a time of weak earnings may well be enough to push VLCC and Suezmax owners down the scrapping route. Either way, the demolition of older double hull tankers will be one good (and possibly necessary) way to help VLCC and Suezmax owners reverse their fortunes” concluded Gibson.
Meanwhile, in the latest week, VLCC Owners in the Middle East Gulf proved once again how vulnerable they allow themselves to be to any short term slowdown in the pace of fixing. According to Gibson, “the week started in fairly lively fashion, and that allowed for rates to inflate to WS 55 to the East, but mid-week holidays in India and Singapore provided a firebreak, and once the flow reduced, Owners were quickly put on the backfoot and rates returned to close to WS 50 East and WS 35 West. The second half of November is barely touched, so there is potential for a busier patch, but Charterers may have learnt their recent lesson, and decide not to oblige. Suezmax availability was perhaps on the light side, but Owners were frustrated by a lack of sufficient enquiry to prove themselves, and rates remained stubbornly flatline at around 130,000 by WS 85 East and WS 50 West. Aframaxes got busier once again, but the net result was that rates remained at around 80,000 by WS 107.5 to Singapore, though they could 'push on' a bit next week.
Suezmaxes in West Africa started where they left off - upon a downward path, that ended with bottom touched at 130,000 by WS 72.5 for the US Gulf. Thereafter, Charterers reacted by bargain hunting which allowed for a very slight rebound to WS 75, but further gain looks unlikely unless volumes increase sharply early next week. VLCCs were very thin on the ground in the fixing window, but there were very few opportunities for inter-Atlantic trade, so rates remained pegged at no better than 260,000 by WS 57.5 for US Gulf. The gain in the AG, however, did raise sights to the East as ballasters became less competitive, so that rates improved to WS 55 for those destinations.
Once Charterers had exhausted their earlyish requirements that had bumped up against frugal supply, the resultant quieter period led Owners into a rather undignified scramble downwards to 135,000 by WS 100 from the Black Sea, and to WS 87.5 cross-Mediterranean with more discounting possible. Aframaxes lost all their bravado, and ended up with rates of 80,000 by WS 95 cross-Mediterranean - around half the rate of two weeks ago! Too many ships and not enough cargoes - and certainly not enough Bosphoros delays to help either” concluded the shipbroker.
Nikos Roussanoglou, Hellenic Shipping News Worldwide