Monday, 12 September 2011

Tanker owners get the jitters

Norwegian shipbroker Fearnleys says that VLCC tonnage will grow at 14 percent this year and 9 percent in 2012, if no existing tonnage is scrapped. As tankers lie idle around the world- notably in the Bay of Algeciras, a strategic lay up location- owners are increasingly concerned at analysts' numbers that suggest that the growth in the tanker fleet is way ahead of oil consumption growth in a sluggish global economy. World oil consumption growth projected for this year is just 1.3 per cent; this is expected to increase marginally to 1.8 per in 2012.

They may have much more reason to worry. A recent Lloyd's List report says that rumours are growing that Chinese oil companies will order up to 80 VLCC's that Lloyd's says will “kill the market", adding that "shipbrokers and owners are digesting the gossip and the dire consequences." Analysts say that the impact of the unleashing of this massive tonnage has the potential similar to the impact on the bulker market of the Very Large Ore Carriers ordered by Vale recently; they say it will change the economics of the tanker trade completely. 

With conditions slated to be unfavourable over the next year and a half, tanker owners are already struggling trying to figure out how they will survive the prolonged slump forecast. Andreas Sohmen-Pao, the CEO of BW Maritime admits that the market is “exceptionally weak and earnings are pretty close to zero, while break-even rates are close to $30,000 a day.” BW Maritime may be slightly better placed in these times, having ordered no new vessels since 2007.

Optimists point out, however, that many companies are doing well in the spot market as they take opportunistic calls on the periodic spikes in rates. Others have opted to place their vessels with decent long-term charters, most of which are still profitable. Companies that are suffering more, they point out, are those that have expanded tonnage in recent times, miscalculating tonnage demand in an increasingly fickle market and putting great stress on their balance sheets. Bruce Chan, CEO of Teekay Tankers, recently told reporters that more than half of Teekay's ships had fixed charters over the next year.  “That covers off all of our costs, even if the other ships carry nothing,” he said.

Some other operators are sitting on large amounts of cash. Frontline's John Fredriksen is one of them; he had admitted a year ago that Frontline had a war chest of billions of dollars in cash to take the advantage of any opportunities in a future downturn.

That future may be here soon. As Frontline's CEO Jens Martin Jensen told the Financial Times a few days ago, “Normally you get the best deals in bad markets,” He added, “I think there are some good opportunities now. There are many more coming after the summer.”

If the Chinese order eighty new VLCC's, as Lloyd's rumours suggest, those opportunities may even get bigger.

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