Thursday, 14 March 2013

Future shock to VLCC’s- the order book.



Analysts are warning VLCC owners that the coming year will likely be extremely tough for them. One, Poten and Partners- broker and commercial advisor for the energy and ocean transportation industries- has just issued a report saying that the VLCC market is set for another dismal year, with time charter rates already well below break-even levels of around $28,700. This, Poten says, is despite the fact that new build prices have fallen to $90MM. Meanwhile, “TD1 spot rates have fallen into the teens, while other Baltic VLCC routes have also dropped precipitously in the new year,” the consultancy noted, warning that with order books growing on the back of speculation, owners need to be extremely cautious.

In a separate report, Drewry Maritime Research says that "the impact of falling rates has been amplified by bunker prices rising in line with international crude prices.” Drewry seems slightly optimistic about the near term, though, saying that Asian demand- from India, China and the Far East- will support the market somewhat and drive growth in oil movement between the Middle East and West Africa, which should boost the tonne-mile demand for tankers. 

Poten admits it has been taken by surprise by the recent mini-revival in VLCC new build ordering. “There have been a few notable orders of VLCCs thus far in 2013, and in a move that we did not previously foresee materialising this soon, the VLCC order book has begun to rebound, reaching 83 vessels or approximately 13.5% of the total fleet size,” its report says. “Still, the question remains: why do large-scale orders continue in the face of persistently dismal earnings? The desire to “buy low” and be prepared for a scenario in which rates recover is enabled via continued credit extension by export-import lending entities controlled by governments that may view shipbuilding demand through the lens of domestic employment”. 

A case in point: an official of the EXIM Bank of China told Reuters recently, “No matter if the market is good or bad, as a policy bank we will continue our efforts in providing more support for the (Chinese) shipping sector”.

Such expedient national policies may actually harm unwary shipowners, analysts warn. "It is necessary for owners to be extremely disciplined in order for the hangover of the last decade’s vessel procurement to subside and for the supply/demand dynamic to reach levels that support more robust earnings,” Poten says, warning that deliveries will pick up later this year and, given the flat demand, will hurt the market whose macro indicators and crude demand graphs do not appear to be encouraging. 

“Forecast utilisation levels and associated time charter rates would likewise be negative for earnings in the spot market as the two are closely correlated" Poten says, concluding with a warning: ".. Owners, drawing on their experience of the boom years that have followed previous busts, view the current earnings environment as an opportunity to be well-positioned for the next cycle by having a larger fleet in a higher margin environment. This has the potential to become self-defeating… owners should be wary of speculative purchases.”
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