During the next two years the VLCC and Suezmax fleets are projected to post net growths of 21% and 19%, respectively, which is well out of step with demand growth projections said George P. Los, Research Analyst with Charles R. Weber Company, Inc.,
in an interview with Hellenic Shipping News Worldwide. "Should newbuilding ordering remain at present levels, it will at least prevent an unnecessary prolonging of overcapacity in the long term and possibly from mid-2013 earnings will progress into the recovery stage. For the smaller crude tanker size classes and Medium Range product tankers, a sustained recovery is less distant as fleet growth projections are more closely correlated with demand growth projections" said Mr. Los.
During the first quarter of the year we've rarely seen any tanker newbuilding orders, a development especially noted in the VLCC segment.Β Why have ship owners refrained from further orders?
The pace of newbuilding orders declined significantly during the first quarter and fresh tanker newbuilding contracts totaled just 1.8m dwt.Β By contrast, during 2010 some 42.2m dwt was ordered "“ a level which was historically uncharacteristic to the early recovery stage of the tanker cycle.Β The 2010 orders were largely speculative as lower steel prices and a declining orderbook had allowed newbuilding prices to fall to about 40% from peak levels.Β Simultaneously, the outlook had appeared more promising with earnings strengthening during the first half of 2010 as a steep oil futures contango prompted traders to buildup inventory levels on shore and on tankers at sea which at once boosted demand and tied up some 10% of the trading VLCC fleet on storage contracts.Β Thus, with many owners in a strong cash position and capital in greater availability, the investment opportunity seemed attractive and well-timed.Β However, after the contango structure evaporated midway through 2010 overcapacity reemerged, earnings trailed off and have largely remained recessed since.Β Whilst newbuilding prices remain attractive relative to steel prices and historic averages, owners are now grappling with cash losses and difficulty adhering to loan covenants.Β Thus, few owners are in a position to make speculative orders and instead many of those which are now being placed are backed by term employment contracts.
Do you think that this will help alleviate further oversupply issues in the market in the years to come?
The reality is that oversupply has already permeated much of the tanker sector.Β VLCCs have seen rates rise recently, but only as a function of rising bunker costs for owners to maintain level voyage returns"”but these are already below operating costs on many routes and slowing ton-mile demand is now softening rates.Β During the next two years the VLCC and Suezmax fleets are projected to post net growths of 21% and 19%, respectively, which is well out of step with demand growth projections.Β Should newbuilding ordering remain at present levels, it will at least prevent an unnecessary prolonging of overcapacity in the long term and possibly from mid-2013 earnings will progress into the recovery stage.Β For the smaller crude tanker size classes and Medium Range product tankers, a sustained recovery is less distant as fleet growth projections are more closely correlated with demand growth projections.
Since late 2010 and up until today, is it safe to say that crude trades and routes have been constantly reshaping and shifting, as a result of various extraordinary events?Β How as this affected freight rates?
There has been no shortage of extraordinary events this year, some with greater implications for trade routes and freight rates than others.Β
The outbreak of unrest in Libya has been a significant event.Β With the departure of the foreign operators of Libya's fields oil production was significantly impacted and shortly thereafter UN sanctions halted exports.Β With Libya's 2 Mb/d supply of crude off the market indefinitely, the European refiners who collectively comprised the greatest end-users of Libya's light crude blends have had to source the shortfall from other locations.Β A significant portion has been supplied by West Africa, where ideal light blends are in close proximity and can be sourced in the smaller parcels the European refiners are accustomed to.Β This has reduced the volume of West African crude exported to Asia "“ a route which has in recent years been a significant ton-mile multiplier for VLCCs "“ and prompted more Eastern requirements to be sourced from the Middle East which is a relatively short-haul route.Β Replacement light crude has also been sourced from other producers, including Saudi Arabia where light crude production was ramped up and exported from ports on the Red Sea to the Sumed pipeline and subsequently by Aframaxes to Europe.Β This has helped stem the decline in Aframax utilization from lost Libyan exports, but overall the implications have not been good for the tanker sector.
How do you expect the Japanese disaster and following nuclear crisis to impact the tanker sector?
In the initial aftermath, six refineries with a total of 1.4 mb/d, or 30% of total refining capacity, were shut.Β Many Pacific South American importers of Japanese oil products were forced to source from US refiners, which augmented already strong demand for Medium Range product tankers in the Americas.Β Although lower crude imports were not immediately observed on the tanker spot market, official figures for March show a 6.3% drop from a year earlier and recently some VLCC units have appeared on spot market position lists which are normally on term employment shuttling crude from the Middle East to Japan.Β Β Lower crude imports could remain for some time until Japan can fully restore production in the industrial sector and progress more aggressively into its reconstruction efforts.Β Possibly during the third or fourth quarter, oil demand will spike to above pre-earthquake levels on this basis and boost tanker demand before giving way to pre-crisis levels.Β As for the nuclear crisis, a boost to oil products imports has driven Eastern product tanker trades as alternative power sources are sought.Β In the longer term, the nuclear crisis should see greater investment in natural gas power plants which could prove very supportive of the LNG tanker market.
Do you think that the crisis in North Africa and the Middle East will affect tanker trades for a long time?
In Libya, the standoff between Muammar Gaddafi's loyalists and opponents appears unlikely to be resolved any time soon.Β Given rhetoric from the West, a solution in which Gaddafi retains power is unacceptable but resolve to remove him forcibly does not exist.Β It is unlikely, therefore, that Libyan crude will return to market in the near term and this will continue to have negative implications for tanker trades.Β For oil markets, the situation has created a deficit of light crude which has propelled oil prices to highs which threaten both world economic growth and oil demand growth.Β
In other supply areas, like Saudi Arabia and Bahrain, protests have not progressed into something more destabilizing.Β However, to ensure this outcome billions of dollars were spent, making those governments require higher crude prices to fund domestic budgetary shortfalls.Β Although most of Saudi Arabia's spare production capacity is of sour grades, the initial boost to production in response to the problems in Libya included both light and sour grades.Β Maintaining higher sour crude production despite sufficiently supplied markets could help ease prices on a purely psychological basis but it is not a sensible solution.Β Whilst the stronger light crude exports will likely remain, these are oriented to short-haul tanker trades and tanker upside from longer-haul sour crude exports is unlikely.
How do you expect oil demand to shape up this year?
Strong economic growth in oil-intensive developing economies and high stimulus spending in developed economies propelled world oil demand to a fresh peak at about 87.0 mb/d during 2010 "“ representing a gain of 2.4 mb/d from a year earlier.Β For 2011, economic growth remains strong in the developing world, but inflation in Asia will slightly limit growth there.Β Moreover, the rise of oil prices to 43% above the 2010 average will offset the growth potential that easing unemployment figures and a steady recovery in the developed world creates.Β So, I believe that something closer to a 1.6 mb/d gain would be a reasonable estimate for 2011.
Nikos Roussanoglou, Hellenic Shipping News Worldwide