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New deliveries - not as many as you think?

We have taken a look at brokers and consultants view of what 2010 holds. Most ‘pundits’ believe it will prove to be a difficult year – one of consolidation  – with a possible pickup in fortunes during the third and fourth quarters.

The starting point was assessing the future tanker deliveries, what had already been delivered and the current scheduled orderbook for this year with the help of leading London broker EA Gibson’s research team.

Gibson said that 443 new tankers above 25,000 dwt would be expected to enter service this year; which on the face of it would indicate more new deliveries than the 405 seen last year.

However, the collapse in market earnings last year led to newbuilding contract renegotiations, delays and cancellations. The nature of these changes was not always transparent and tended to be kept ‘behind the scenes’.

Nonetheless, some handle on developments can be determined by looking at what the scheduled tanker orderbook was for 2009 at the start of the year and comparing it to what actually happened.

From this, 79 tankers out of the original 484 scheduled for 2009 were not delivered, accounting for 16% of the original orderbook. Looking at the breakdown by size, Suezmax and MR deliveries were around 75% of the original schedule; VLCC and LR1 deliveries were higher, at 89%, but the Aframax/LR2s were surprisingly high, with almost all scheduled deliveries actually coming out of the yards, Gibson said.

Given the collapse in the tanker market seen in 2Q09, there is more leeway for delays to the 2010 delivery schedule than the 16% witnessed last year. Gibson made the assumption that some 25% of 2010 scheduled deliveries would not materialise this year and as a result only 300 new tankers would join the fleet (compared with last year’s 405).

Looking at each size group, there would be around 50 VLCC deliveries, 40 Suezmaxes, 65 Aframax/LR2s, 25 LR1s and 120 MRs. Using this and taking into account the forecast of scrapping and conversions, the net gain in tanker fleet above 25,000 dwt would be around 175 vessels this year, compared with 314 last year; still an increase, but not as much as in 2009.

However, substantial growth in oil demand and trade will still be required even to absorb this more modest growth in tanker supply, Gibson concluded.

Recycling

Turning to recycling, by 5th February, some 1.2 mill dwt of tanker tonnage had been sold for breaking thus far this year, according to a Gibson’s weekly tanker report. The sheer volume of tanker tonnage coming onto the demolition market could be the only stumbling block give that Bangladesh beaches are a favoured destination for recycling.

Last year, 62 of the 93 tankers sold for recycling ended up in Bangladesh, mainly due to higher lightweight prices negotiated and the dubious attraction of not requiring a gas-free certificate. The dangers associated with this kind of work were highlighted at the end of last year when several workers were killed and others injured while cutting up a tanker.

Incidents such as this will add to international pressure on the traditional shipbreaking nations to accept tighter regulations, such as that proposed by the IMO’s Hong Kong Convention, which was adopted last year, but thus far has not gained a single signatory. Last year’s Bangladesh tanker intake was more than double that seen in 2008. Thus any significant changes could have implications on the price level on offer and perhaps more significantly on capacity, Gibson said.

In an analysis of last year’s statistics, Gibson said that 10 VLCCs were sold for recycling, nine of which were sold from August onward. The largest tanker sold was the 285,900 dwt Front Vanadis, which fetched $325 per ldt. The highest price paid was reported to be $378 per ldt for the 249,000 dwt VLCC V Malibu. The total deadweight of vessels sold was 7.2 mill dwt (vessels of over 10,000 dwt).

In addition, there were four Suezmaxes, 15 Aframaxes, 12 Panamaxes and a massive 38 MRs, sold for demolition, which could have been caused by the rock bottom market for product and chemical tankers.

Last year, demolition prices remained comparatively firm, but well below the levels seen in 2008. The first VLCC sale this year achieved $415 per ldt. The strengthening prices were seen across all sectors with Indian breakers becoming prominent. With 13% of the fleet of single hull construction, there are plenty of candidates for the recycling beaches this year, Gibson said.

Floating storage

Another sector looked at by the broking house’s research department was the floating storage position. Both crude and clean products were being stored in abundance since early last year. Contango play, weakened oil demand, record levels of land-based crude and product stocks, changes in regional patterns of oil consumption and very low freight rates all combined to give market participants a range of opportunities to play the storage game, Gibson said.

By November last year, 149 tankers were storing 55 mill barrels of crude and 98 mill barrels of clean products, enough to satisfy global demand for nearly two days. This translated into 6-8 % of the VLCC fleet and up to 35% of the LR2 sector being tied up at any one time, which helped to prop up spot rates, by taking enough vessels out of the market.

While difficult to quantify, Gibson said that it was worth comparing the fortunes of the VLCC against the MR last year. VLCC earnings on the benchmark TD3 route (MEG­East) averaged over $31,000 per day, above fixed operating costs. By contrast, MRs, not used for storage, averaged $7,000 per day on the TC2 route (UK/Cont-US), which was very close to breakeven.

This year began positively with rising spot rates, oil prices and oil demand. VLCC spot earnings trebled to peak at just over $101,000 per day and WTI crude rose to a 15-month high of 82.75 barrels, partly in response to the extreme cold weather in the Northern Hemisphere. This resulted in the narrowing of the oil price contango coinciding with higher charter rates, which led to a number of storage vessels discharging their cargoes. However, this was partly offset by more storage tonnage being taken in the Far East.

By the end of January this year, the number of storage tankers had fallen to 119 from 141, less than feared. Again, storage will be a key factor to determining the rates for this year. Gibson reasoned that any downward pressure on tanker rates caused by the redelivery of storage vessels and a return to a steeper price contango with warmer weather/lower oil demand could recreate the conditions that encouraged floating storage in the first place.

With current high freight rates (end January) and a shrunken contango, the ingredients do not mix well, but storage participants, having successfully played the game, will be ready to act quickly, if and when the right recipe redevelops, Gibson concluded.

Asian storage

Gas oil stored on tankers in Asia had swolen to unprecedented volumes of at least 14 mill barrels by the middle of February this year and could rise further as weak global demand persists, prompting traders to turn to this region for support, reported Reuters.

The volumes, which were enough to meet 16% of global daily oil demand, come as the current East-West arbitrage economics was not viable, even as Western distillate supplies are gradually drawn down during the cold winter.

"Players are positioning their vessels mostly in Southeast Asia, waiting for the East-West arb (arbitrage) to open, so they can float them over to Europe," said a distillates trader with a European trading firm, talking to Reuters.
But overall global volumes remain heavy and traders may also be hoping for demand in India, Indonesia and Vietnam to take up the supply, ahead of spring maintenance in Asia and as refineries here face the occasional outages, sources said.

Most of the 18 LR tankers storing a total of nearly 2 mill tonnes of gas oil are anchored off Southeast Asian, with a few located off India and the MEG.

At least six Panamaxes, nine Aframaxes and three Suezmaxes, were anchored off Singapore, Malaysia, Indonesia, Fujairah and Sikka along the Indian coast.

Charterers include European trading houses Vitol, Sempra, Mercuria, Trafigura and Glencore, as well as oil major Shell and US investment bank Morgan Stanley, the sources added.

More trading houses could join in the contango play when the market structure widens towards the end of winter as demand for heating fuel thins out, analysts and traders said.

For now, the vessels will probably remain in Asia, as it would too costly to move cargoes to Europe, as had been done regularly since the first quarter of last year, traders said.

McQuilling’s view

Under the influence of massive orderbook deliveries, and IMO-mandated exit profiles, the tanker fleets are poised to endure some drastic changes to net composition.

This year will see over 300 newbuilds joining the fleet, tempered by nearly 200 single-hulls beaching for recycling. The net result may offer some balance through 2010, but come 2011, McQuilling Services forecast that the tides may turn once more.

McQuilling presented the tanker fleet supply estimations based on a reference case scenario. In January, the consultancy found 1,055 confirmed orders for tankers of 27,500 dwt and above for delivery through 2014 (confirmed orders being those with IMO numbers assigned).

From this figure, some 1-2% of the orders were deducted due to possible cancellations from contracts held by financially questionable owners in similarly challenged yards. In addition, IMO I and II type chemical carriers were excluded, thus arriving at an orderbook of 899 vessels.

Against the newbuilds, the exit profile assumed that over half of those vessels due to leave the trading fleet in 2010 will actually exit, with the remaining continuing to trade having passed life extension inspections as per IMO provisions.

Given poor returns, narrowing trade opportunities, and a considerable cost for the 4th and 5th special surveys, it is likely that few owners will invest in the extension of single-hulls.

However, after careful review of flag states that own single hull tankers, together with their IMO-13G stances, it would appear not all are ready to let older tonnage retire so soon, McQuilling thought.

In order to arrive at projected tonnage supply, the exit profile for each sector was combined with the anticipated deliveries to produce a net fleet growth. All tanker sectors, except Panamax and MR1 product carriers, show net fleet growth during this period.

The Panamax sector decreased by 11 vessels last year, and is expected to contract further in 2010 before seeing a slight growth in 2011. The aged MR1 fleet also decline in number this year, before seeing a four-vessel net increase in 2011.

In the larger sectors, the VLCC fleet experienced a 24 vessel growth last year and is set to see further growth in 2010 by 31 vessels. The Suezmax fleet saw a net increase of 42 vessels last year, but expansion will slow to 19 vessels in 2010 - largely tempered by forecasted delays from particular yards that hold a significant portion of troubled orders.

McQuilling’s long-held perspective is that the majority of tanker sectors are oversupplied with tonnage relative to demand. Net fleet growth is expected to peak in 2011, particularly evident in the VLCC and Suezmax sectors.

TankerOperator

 

 

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