The tide turns for tanker sector

Thursday, 12 March 2009

Lower oil prices and the economic downturn make the outlook less certain for tanker owners, but shipbuilders still have substantial orders on their books, writes Martin Clark JUST a year ago, orderbooks for new vessels were at record highs and growing, driven by an economic boom and high oil prices. The expansion of the global fleet covered all the main vessel types – tankers, bulkers and containers. But with the global economy imploding and oil prices a fraction of what they were, operators are cancelling and delaying orders as demand for oil and shipping falls.

The last few months have seen new-building orders cease and the price of vessels drop, as freight rates return to long-term averages. Total new build orders in 2008 were around half the very high levels seen in 2007.Significantly, there were no new orders placed for very-large crude carriers (VLCCs) during the final quarter of 2008, reflecting the sharp deterioration in confidence at the end of the year. There were 501 VLCCs in use worldwide at the end of 2008, according to Fearnleys, a shipping brokerage. In addition, there were 227 on order – down from 238 at the end of the third quarter of 2008, because of cancellations, but still equivalent to a substantial 45% of the existing fleet.

Ship-engine builder Wartsila flagged up the increase in order cancellations at its 2008 results presentation, last month. It says up to 400 vessels in the large tanker and bulker segments were cancelled during the year – which could cost it up to €0.8bn ($1bn) – and that further cancellations will occur.The irony is that 2008 proved a record year for Wartsila in terms of sales and profitability, underlining the stark contrast between the bullish early months and the near collapse – in terms of orderbook activity, freight rates and confidence – in the second half. Other big shipbuilders had a similar experience: Daewoo Shipbuilding & Marine Engineering, for example, achieved record sales in 2008.In addition, despite order cancellations and the poor outlook for the market in general, shipbuilders still have substantial orders on their books.

Hyundai Heavy Industries plans to deliver a record 119 ships in 2009 – topping last year's 102 – from an order backlog of 350, which would normally take three years to build.Yet it is a difficult time for shipowners: the outlook for new-vessel demand has become considerably less certain, as has buyers' ability to pay for them. Spot-market activity has fallen as oil demand in OECD countries has dropped and as Opec has cut production. VLCC spot-trade activity was down by 13% in October 2008-January 2009, compared with the same period a year earlier according to Poten & Partners, a consultancy; the number of fixtures in the Suezmax and Aframax segment was also down.Notwithstanding a year-on-year increase in activity in December (see p24), most signs point to a big slow-down, with more tonnage set to enter the fleet at a time when it may not be needed.

Natural attrition will mop up some of this capacity, as older vessels are retired: the exodus of single-hull tankers – there are still some 110 single-hull VLCCs in service – is expected to gather pace in 2009 in advance of phase-out deadlines and because of the weaker trading outlook. Around 30-35 VLCCs are also reported to be in use as storage facilities, as companies attempt to achieve maximum value from the oil-market's contango. Yet Fearnleys still expects to see the highest net fleet growth this year in decades – about 10% – despite any non-deliveries and demolitions.McQuilling Services, a maritime consultancy, says the next four years may be very difficult for tanker operators. "The tanker sector faces record orderbooks for the delivery of vessels over the next several years," according to its January 2009 Tanker Outlook. "The need for this new tonnage is uncertain in the face of declining global oil consumption." It also says the investment to fund these deliveries is well in excess of previous requirements, but the conditions in the shipping-finance markets are far from supportive.

There is a view that this could be a blessing in disguise as it may result in higher non-deliveries post-2009. This could mean the industry might avoid chronic over-supply that could result in poor freight markets for as long as a decade. Piracy forces the cost of shipping to rise INCIDENTS of reported piracy are rising, pushing up shipping costs and forcing freight companies to consider new routes. The International Maritime Bureau (IMB), which has tracked reported piracy incidents for many years, says 2008 was the worst on record for hijackings and crew taken hostage.It says there were 293 incidents of piracy and armed robbery against ships in 2008, more than 11% up on 2007. Worldwide, some 49 vessels were hijacked and 889 crew taken hostage. In addition, 32 crew were injured during these attacks, 11 killed and 21 are missing, presumed dead.

The IMB attributes the rise on what it called an "unprecedented" number of attacks in the Gulf of Aden region. This troublesome area, a stretch of water between Somalia, the dysfunctional African state, and Yemen, leads into the Red Sea and Suez Canal, one of the world's busiest maritime highways and a crucial oil-transit route.Last year, pirates captured the fully laden Sirius Star very large crude carrier (VLCC) off the Horn of Africa, grabbing news headlines worldwide. The ship was carrying 2m barrels of crude. Not long before, in the same area, pirates seized a Ukrainian ship filled with Soviet-era T-72 tanks. Both were released after ransom money was paid.

Growing threatThe growing threat of piracy in the Gulf of Aden area has caused insurance costs to rise. Large insurers, such as Aon, have launched niche policies to protect ship owners from loss of earnings in the event of a vessel being detained by pirates. Aon estimates the average duration of vessel seizure is 60 days. Some shippers are now avoiding the area altogether, moving freight around the tip of Africa to bypass Suez, adding time and cost to journeys.Other piracy-prone regions include Nigeria, with 40 reported incidents, although this may just be the tip of the iceberg. The IMB is aware of at least 100 other incidents in Nigeria that were not confirmed. Although the Malacca Straits – another important oil-transit route – has seen piracy activity decline, the result of heightened vigilance and extra maritime patrols. Similar measures could improve the situation in the Gulf of Aden, where the growing foreign naval presence is providing much-needed support to local patrol vessels.

The IMB says international navies are the only forces capable of an effective response against piracy in the region and to secure the busy route for traffic. It has called for more proactive rules of engagement to allow naval commanders to play a more decisive role.Long-term time-charters: a lifeboat for sinking shippersTHE BIG tanker companies could be facing a tough year. While last year's freight rate averages were up on 2007, a sharp drop in the latter part of 2008 – mirroring the plunge in oil and bunker fuel prices – could mean trouble.During 2008, VLCC rates peaked around July, at about $175,000 a day for Middle East-Japan routes; a year earlier they were below $40,000/d. These rates enabled the large, listed tanker corporations to turn a tidy profit, at least during the first half of the year.

Full-year 2008 profits are yet to be announced by the big tanker groups, but should hold up well, given the buoyant start to the year.But 2009 may look different. Towards the end of 2008, freight rates plummeted – returning closer to long-term averages. The rapid decline and the poor economic outlook have already started to affect operators.Share prices in Oslo-listed Frontline have lost more than a third of their value since last summer, a fate not dissimilar to many oil-production companies. Frontline's prospects have been downgraded by some analysts, citing over-exposure to the increasingly perilous spot markets.The weak global economy and reduced demand for oil continues to put downward pressure on spot rates. At these times, shippers typically seek a degree of comfort and security in longer-term time-charter contracts to provide some guaranteed income. New York-listed General Maritime, which is mainly focused on the medium-size tanker market, has a substantial 77% of its fleet on time charter. This will bring with it about $450m of contracted revenues from 2009 through 2012, including $250m this year alone.

But confidence among shipowners remains decidedly fragile. Niels G Stolt-Nielsen, head of chemicals tanker group Stolt-Nielsen, told investors recently that he sees little cause for optimism, with 2009 and 2010 likely to prove "extremely challenging years". But as Poten & Partners, a consultancy, noted in a February report, the tanker market has a habit of changing rapidly. "Shippers and charterers alike should hope for the recovery of spot-tanker activity as it will be a transparent metric of the road to economic recovery."

Source: Petroleum Economist