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Saturday, December 16, 2017

Review of 2004/projections for 2005

No doubt 2004 will stand out in the history of shipping as a highly profitable year, with the oil price, freight rates and ship values surging to record levels due to the highest oil demand growth since the 1970s.

The demand growth in 2004 was estimated at 2.6 mbd, the highest since 1976 when demand growth was 3.3 mbd. There was increased oil demand from a number of regions in 2004 such as Europe, the U.S. and of course China. Oslo-based broker and analyst RS Platou recorded a tanker capacity utilisation rate of 91.5%, up from 89% in 2003, the highest since it started recording in 1986.

The future of the tanker market will very much depend on continued growth in China and the U.S., two economies which have become very much inter-related. Even if growth in demand is projected to be lower this year than in 2003 and 2004, it is still likely to be strong. However, most of the supply to cover this growth is forecast to come from “short haul” suppliers such as the Former Soviet Union (FSU) (+0.6 mbd) and N America (+0.3 mbd).

At the same time the tanker fleet has also increased, although not at the same high rate. Even assuming that some scrapping will follow phase-out requirements, despite strong tanker earnings, the table below shows that the fleet will increase more in 2005 than in 2004 and will also increase strongly in 2006. Projecting the fleet by using the orderbook from Clarkson and the phase-out required by MARPOL according to our own records, the fleet increase in 2005 will be greatest for panamaxes (10%), with aframaxes increasing by 9% and suezmaxes by 8%, whereas the VLCC fleet will increase by some 7%. In addition some conversions may also be included in estimated totals, but, as we have repeated a number of times, the phase-out figures for large tankers are going to be very limited - during the next 3 years 2005-2006-2007, VLCCs phased out per year are likely to be 2-1-3, suezmaxes 2-4-4, aframaxes 12-6-37 and panamaxes 18-0-9. The figures for deliveries are to some extent fixed for this period as the shipyards are now taking orders for 2008. A few more orders may, however, still be included for 2007, and perhaps earlier for smaller tankers.

Members wishing to have figures for each segment for phase-out, deliveries and the fleet for the period 2004 – 2007 may contact Erik Ranheim .

Freight rates reached record levels in 2004 despite the highest deliveries since 1973 and sales for decommissioning totalling only some 8.5 m dwt. Disposals for demolition were low even though there has been a world shortage of steel which helped push demolition prices to a record high in 2004. The overall recorded average price per ldt for 2004 was some USD 374 per ldt, up from USD 224 per ldt in 2003, and USD 152 per ldt in 2002. The USD 24 m that was paid by Bangladesh breakers for the 404,531 dwt Marine Atlantic was probably the highest price ever paid for a ship sold for demolition.

Only 3 VLCCs were sold for decommissioning in 2004, plus two FPSOs above 200,000 dwt, but this is a result of the massive renewal of the fleet and the sale of 232 VLCCs for decommissioning over the last 10 years. In addition, some VLCCs have been converted into offshore facilities. Very few VLCCs were built at the beginning of the 1980s, which means that only 11 VLCCs could potentially be due for phase out before 2010, the year when there will be a split between the countries that will accept single hull tankers up to the age of 25 years until 2015, and those that choose not to.

The number of period contracts above 6 months declined in 2004 (139) as the market boomed, but was still higher than in 2003 (107). The highest time charter (TC) contract we have ever recorded was the one-year contract for the 1997-built 151,458 dwt Gulf Scandic from 16 November 2004 at a rate of USD 56,500 by the charterer Tesoro. The average period in 2004 was 2.4 years and there were 78 contracts for 2-10 year periods. A couple of years ago the normal period was one year. It is mainly young tankers that are taken on long period charters and the average age of the tankers thus contracted was 8.7 years against the average age of the fleet of some 12 years. The average TC rate went up from an average of some USD 18,000 in 2003 to USD 25,700 in 2004, a figure for rough guidance only, since comparing average TC contracts for various periods and sizes is not statistically quite correct.

The table below also shows the strong increase in newbuilding prices, a 43% increase for VLCCs. Nevertheless the shipyards are struggling right now as they are today building at the rock bottom prices contracted a couple of years ago, since when steel and equipment prices have risen enormously.

The table below demonstrates just how great the volatility in the spot market, has been with high peaks at more than double the average and more than six times the low point. Even the average rates generate a tremendous gap between break-even and T/C equivalent earnings. In such a situation, however, it should be remembered that 2002 was a poor year for the tanker market, and that for long periods during the 1980s and 1990s tanker freight rates were below break-even rates.

 

Freight rate TC equivalents

Break even 2003*

Break even 2004*

Segment/trade

Average

Min

Max

VLCC AG - Japan

91,533

36,116

227,092

28,500

36,900

Suezmax WAFR - USAC

62,573

22,818

139,659

23,000

27,600

Aframax N Sea-Cont 80,000 dwt

43,533

13,550

99,005

18,600

22,900

Cl. Caribs-USAC 30,000 dwt

22,874

12,341

33,439

14,700

16,800

Cl. Cont-USAC 33,000 dwt

19,624

10,649

30,831

 

 

* 6% Required rate of Return on capital over 25 years , based on NPV calculation, last based on 40,000 dwt tanker