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VLCC ordering - back in vogue

Although thus far in the fourth quarter of this year, newbuilding orders have almost dried up, the third quarter of this year saw 21 VLCC orders placed – the highest number since the corresponding quarter of 2008, shortly before the global economic meltdown.

Given the extraordinary size of the orderbook prior to 3Q10 and the record scheduled delivery profile for 2011, it may seem a little strange that the newbuilding market has seen such a spate of activity, said Gibson Research.

What are the motivations behind this ordering and is such investment as risky as it may first appear?

Given that Chinese government has demanded that half of the country's domestic crude imports be carried in domestic hulls by 2015, it is unsurprising that Chinese companies account for one third of the new orders.

With regards to the risk involved, it seems less dangerous given the directive is governmental. In the case of Chinese state oil companies, the investment will come directly from Beijing itself.

However, there may be another completely different reason that has encouraged investment from others in the VLCC sector. For example, `cheap' asset values have no doubt encouraged investment from elsewhere among cash rich owners prepared to take a long term view.

VLCC prices averaged around $105 mill (South Korea) in 3Q10. This represents a significantly low point of entry for tanker market participants and perhaps a much more suitable option than secondhand tonnage. While five year old VLCCs may be cheaper at $92 mill in the same period, there are two disadvantages, Gibson said. First, immediate delivery into a depressed market and second a vessel built to the specifications laid down by another owner.

The newbuilding option appears a more strategic acquisition based on price and future delivery. Furthermore, continuing demand for increased fuel efficiency and larger cargo capacity may ensure that modern vessels, built to the most contemporary specifications, are more competitive.

Notably, despite the current extremely weak situation, average VLCC earnings are 30% higher year-on-year to date than 2009 - although this is attributed in part to tonnage used for floating storage. Looking forward, global oil demand is forecast to increase by an average of 1.3 mill barrels per day per annum over the coming four years.
Important to note for VLCC owners, the majority of these gains are expected to be met by long haul crude movements.

Thus, it appears recent ordering is driven by a combination of `cheap' asset values, governmental demand and a long term view on behalf of independent operators who believe that there will be greater demand for larger, modern, more efficient VLCCs compliant with increasingly stringent vetting procedures, Gibson said.
Given the `cheap' prices achieved in 3Q10, there will be less pressure on these orders than those made at much higher prices in 3Q08, Gibson concluded.

A challenging scenario

A major question that remains in the tanker market for next year is whether the over­investment in buying new tankers will be offset by a strong demand for crude cargoes, shipbrokers Poten & Partners said in recent a report analysed by Platts.

"There have been modest signs of recovery reflected in the fourth quarter 2010 as VLCC cargoes of crude oil in the Middle East Gulf have seen a 20% increase year to date," the report said.

Vessel supply has long dictated the speed of market recovery, white the age restrictions at terminals and industry standards for younger trading vessels may push more tonnage out of the market, it added.

Giving a break up of the global tanker Heet, the report noted that there were 559 VLCCs and 380 Suezmaxes with an average age of 7.5 years to 8 years; 897 Aframaxes with an age of 8.5 years; 382 LR1 vessels at 6.5 years and 1,350 Handymax and MRs of between 6.5 and 7 years.

With the phase out of single huil vessels almost complete and no improvements seen in fundamentals, the medium term is shaping up to be a challenging time for shipowners, the shipbrokers said, reported Platts. "While orderbook delivery will be a key element of market upswing over the medium term, the near term prospects for the tanker industry remains tied to the recovery of international economies," the report added.

Although there were signs of impending gloom for the tanker market, the global crude demand to the Asian countries, especially China and India, offered hope for the sector.

"Expanding oil demand in these markets will likely translate into increased tonne mile-demand as rapidly growing nations look to sources far and wide to fulfill their domestic requirements," the Poten report said. "A clear understanding of these countries' current role in the petroleum industry and their roles in transforming global tanker trade routes will be paramount in identifying opportunities in these expanding markets," the report added.

 

 

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