Product Tanker Players have shown Distress signals

Specialist ships that carry oil products are increasingly facing seizure by banks or being laid up as the sector becomes the latest to be hit by the crisis in the shipping industry. The problems these specialist tankers are facing are the same as those confronting all kinds of tankers , including large crude oil carriers. But there had been hopes that changes in the oil-refining market would protect this segment from the worst of the downturn.

Short-term spot-market charter rates for medium-range product tankers were $6,240 a day on Europe-North America routes on August 12, according to Dahlman Rose, a New York shipbroker. A year ago, rates were close to $30,000 a day. Stolt-Nielsen Conditions in the product tanker market prompted Denmark's Torm, one of the sector's leaders, to warn on August 12 that it would only break even for 2009, instead of making the expected $100m-$140m profit.

Difficult market conditions are also likely to affect AP Moller-Maersk, another Danish company, which is announcing half-year results on August 21.Maersk, the world's biggest container ship operator, became the world's biggest product tanker operator when it completed its takeover of Sweden's Broström earlier this year."We are experiencing historically low freight rates for product tankers at the moment," said Mikael Skov, Torm's chief executive, as he announced the profit warning last Wednesday.

At the heart of the sector's problems is a simple fall-off in demand for oil and oil products, according to Greg McGrath, an oil industry veteran and finance director of New York-listed Omega Navigation."Demand is down 2.7 per cent year-on-year when it had been increasing 2.3 per cent," he said. However, companies with significant exposure to the short-term spot market are the worst affected. Many operators run their ships on long-term contracts with refiners or traders and are still benefiting from deals struck at the height of the sector's boom.

Marco Fiori, chief executive of New York-listed d'Amico International Shipping, which operates nearly 40 product tankers, said spot-market rates compared poorly with those for longer-term time charters."It's below operating costs," he said of the spot market. "But time charter rates are not really down." Tanker Pacific, a Singapore-based shipowner, has laid up some vessels rather than accept current rates, according to Lloyd's List, the shipping newspaper. Tanker is the first product tanker operator to admit such a step, now common in the container ship and car carrier markets .

Harry Theochari, head of the shipping practice at Norton Rose, a London-based law firm, said the sector's poor performance had led to the impounding of increasing numbers of ships belonging to financially weaker operators. Banks are particularly concerned about sudden falls in product tanker sale prices, which are eroding their value as collateral. "The product tankers are really struggling right now," Mr Theochari said. "It's only going to be the very good, well-run companies that are going to get through this."

There remains some optimism that the construction of new oil refineries in the Middle East and Asia, away from the main consuming countries in Europe and North America, will eventually drive new demand for both product tankers and some chemical segments. Many new tankers have been ordered to serve that market.However, for the moment, as a broker at London-based ACM Shipping pointed out, there is too little demand even to keep the existing oil refineries working at full stretch."It's entirely and fully dependent on demand for energy consumption and therefore oil consumption," he said."If that demand picks up again, then the market will grow again as well."

Source: Financial Times