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Wednesday, October 17, 2018

What determines the floor freight rate?

Who would have believed that rates would again fall below operating costs. Negative rates are even being reported for older VLCCs when waiting time is taken into account. Obviously there are too many tankers around and no positive driving forces in the market.

The tanker market is known to be a market where the supply/demand curve is shaped like a hockey stick, i.e. a rather flat curve and at operating cost levels when there is surplus of capacity, and rising fast when there is too little capacity and the market tightens.


But what are operating costs for VLCCs? There is quite a difference between the operating costs of the most efficiently run new ships and those of an older VLCC. This makes the supply/ demand curve more complicated and the bend of the curve longer and less steep. When freight rates fall below operating costs, it becomes necessary to look at the expectations of the actors in the market. There does not appear to be a great surplus of tankers in the market, and an upturn in world oil demand is expected. What then is causing the despair? Obviously there may be quite long waiting times for some of the VLCCs and operating costs continue even if ships are laid up, but it does not make sense to accept negative rates.


At the recent industry OECD hearing on establishing normal competitive conditions in world shipbuilding, a main issue was the Injures Pricing Code (IPC), where the main shipbuilding countries have agreed that one shipbuilding country can make a case against another if its shipbuilding is injured by the pricing policy of the other country’s shipbuilders and these prices can be demonstrated to be below break-even costs, and thus receive government subsidies. The IPC was initiated as the World Trade Organisation’s dumping code had not been found to be sufficient.


The meeting was amused to hear that “dumping” is normal in the tanker market and the authorities are unconcerned as the industry is not subsidised and the world benefits from cheap freight.


Tanker contracting slows down

The orderbook for tankers and combined carriers (above 10,000 dwt) end March 2002 stands at 615 tankers or 64.3 million dwt (Source: J. Grieg & Co.). Due to the drastic downturn in the VLCC freight markets, the orderbook for VLCCs is the one that has decreased the most. Compared with the end 2001 level, the orderbook for Panamax and Aframax tankers has increased somewhat whereas the orderbook for Handysize and Suezmax tankers has not.


According to Clarkson’s, comparing the first two months of 2002 with those of 2001, the contracting of VLCCs has decreased by 56%, Suezmax decreased by 53%, Aframax decreased by 57%, Panamax increased by 12% and Handysize increased by 1%.


During the first three months of 2002, 3 VLCCs were ordered, 3 Suezmax, 6 Aframax, and 21 Panamax and smaller tankers. This is a marked reduction compared to the same period in 2001 when 12 VLCCs, 5 Suezmax, 19 Aframax and 29 Panamax and smaller tankers were ordered.


Newbuilding prices have fallen. Compared to February 2001, VLCC newbuilding prices are down by 11%, Suezmax -13.3%, Aframax –17.1%, Panamax –18.9% and Handysize –14.8%.


Click here for The details of tanker ordering and prices for 2002.


The tanker orderbook is still at a very high level. In dwt terms, 20% of the VLCC fleet , 29% of the Suezmax fleet, 28% of the Aframax fleet, 27% of the Panamax fleet, and 17% of the Handysize fleet is on order.

Click here for The orderbook development 1994-2002 in tables and graphs.

Click here for Details of the tanker and combined fleet development (both in numbers and dwt for each segment) in the period 1992-2000.