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Drop in tanker demand

A gloomy summer for the tanker market, with little prospect of autumn growth

While the dry bulk market has seen a return of chartering activity, and a corresponding rise in rates, the tanker market continues to be quiet, and spot rates for both dirty and clean tankers appear to have flatlined. As oil prices rise, vessels which had been taken out of the market to act as floating oil storage are returning to the market, creating a glut of tonnage that is further suppressing rates. The active fleet is estimated to have gown by some 4%, coinciding with a 6% drop in tanker demand.

Demand predictions fall

According to figures quoted by Icap Hyde, seaborne crude trade has dropped by an estimated 6.1% so far this year, with tonne-miles down by 7%. The only region in which crude imports have been seen to rise so far this year has been China, with imports at 3.69 million bpd, up from 3.58 million bpd in 2008.

International Energy Agency (IEA) predictions for oil demand have been revised downwards, from an increase of 1.2% per annum until 2014 to an increase of 0.6%, and it looks likely that demand will remain low for the foreseeable future. Oil inventories are high, and according to Platou, current production levels only allow for rates that just about cover operating expenses in the crude market, while demand for refined products continues to suffer as a result of the global economic downturn. In particular, there has been a sharp reduction in oil demand from the US, which is estimated to be down by some 1 million bpd in 2009, according to estimates from the IEA. America’s own Energy Information Administration (EIA) estimates a smaller drop, but still substantial, drop of 640,000 bpd over 2009. While this fall in demand, and the 1.2 million bpd fall seen in 2008, are clearly due to the economic crisis, demand growth was already slowing in 2006 and 2007, suggesting that US oil demand may have peaked. If this is the case, demand for tankers in the region may not recover in line with the rest of the economy.

Icap Hyde, however, takes a slightly more optimistic view of the long-term prospects for the tanker market on US routes, at least on the products side. Despite the fall in US demand for crude, it has continued to import large volumes of petrol – mainly from Europe - and is exporting large volumes of diesel.

Ordering still down

The orderbook remains almost empty, with a total of just 43 tankers ordered since the beginning of the year, according to figures from Platou, a total of 1.4 million dwt. Of these, 38 – 0.8 million dwt – are small tankers, three aframax and two suezmax. No orders have been placed for VLCCs so far this year. STX Shipbuilding received a $168 million order for four MR range tankers in June this year, although analysts warn that these may be the result of failed negotiations with another shipyard, rather than genuine new orders. The vessels will be built at STX’s Korean yard, with delivery slated for 2010.

Secondhand values seem to be showing signs of bottoming out, particularly at the larger end of the market, with prices on VLCCs holding steady for the last three months at $100 million for a new vessel or $87 million for a five-year old vessel, according to Platou.

Stay or go?

For those who bought vessels at the right time, there is still profit to be made on the S&P market. Ship Finance, for example, announced in July that it was to sell the single-hull VLCC Front Duchess to an unnamed buyer for net sales proceeds of $18.8 million. Delivery to the new owner is expected to take place in September/October 2009, and Ship Finance will receive a net amount of approximately $16.0 million after compensation of approximately $2.8 million to Frontline for the termination of the current charter. This continues Ship Finance’s policy of reducing exposure in the SH tanker sector in favour of more modern assets in various shipping and offshore segments.

Faced with low rates and falling values, some owners are choosing to exit the tanker market entirely. Cido Shipping, for example, confirmed at the end of June that it was considering a range of options, including selling its entire tanker fleet. Potential buyers were said to include Gulf Navigation and OSG, although no purchase has been reported.

As oil prices rise, tonnage is returning to the market – and taking prices down

No return to the past?

It certainly seems unlikely that matters will improve substantially for quite some time. According to Martin Shaw, vice president of HSSE at BP Shipping, lower rates in all areas are something that the industry must be prepared to accept for the foreseeable future. Both rates and ship prices are likely to continue to fall, and the numbers look “pretty scary” over the next few years, with some vessels not even meeting breakeven, he warned, speaking at Imarest’s annual Stanley Grey lecture in July.

While this is a situation that the industry has seen before, however, the outcome is likely to be very different, he said. In the 70s and early 80s, this scenario was met with a migration to lower-cost jurisdictions, resulting ultimately in a fall in standards and an image crisis that the tanker industry has still not quite succeeded in shaking off. However, while there are superficial similarities with the crisis of the 1970s, history is unlikely to repeat itself, Shaw says: “It would be difficult to return to those days of slash-and-burn cost-cutting. In part, this is because modern ships just won’t let you get away with it before problems become apparent, and in part because managers are now aware that this is a false economy. Lower standards result in accidents, and accidents do cost, both in terms of money, in terms of raised insurance premiums, and in terms of loss of reputation. People are watching the industry much more intently, and as a result there is a floor in terms of quality that just didn’t exist in the 1980s.”

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