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Tuesday, December 12, 2017

Record high tanker prices

Tanker prices are record high. Demand is the main price driver for shipbuilding, but rising costs are contributing to a rising minimum ‘base’ price level. The price of steel plate has more than doubled from some USD 330 per tonne in 2003 to USD 750 per tonne in 2007. Several equipment producers have increased their prices considerably and are experiencing delivery problems. Labour costs are also increasing in both South Korea and ChinaSouth Korea is the main builder of tankers with 46% of the tanker orderbook, China is 2nd biggest with 26% and Japan has 22%.

 

However, the most important criterion for shipbuilders is perhaps the exchange rate structure of the weak dollar. The first graph shows that the nominal Won price to a great extent has followed the dollar price.

 

However if we create a USD, JPY, WON VLCC price index, with January 1990 starting at 100, the picture is different (see second graph). This graph shows not the currency price, but the won/yen/USD price relative to January 1990 (the actual USD price at five points is noted at the bottom of the graph for easy reference). The index shows that the Yen VLCC price is only just over 20% above the 1990 price, whereas the Won price increased has more than doubled Korea  has a considerable currency advantage compared to the situation in 1990, but since the beginning of 2003 the Korean Won has strengthened considerably while the Yen has remained fairly stable.

 

Dec 1996

Jan 2003

Jan 2007

Yen/dollar

116

119

122

Won/dollar

844

1168

954

In September 2002, Poten & Partners reported that Pertamina had ordered a 300,000 dwt VLCC for the price of USD 65 m at Hyundai Mipo for delivery in 2004. In December 2006 Clarkson reported that SK Shipping Co. Ltd. had ordered a 319,000 dwt VLCC for the price of USD 128 m at Hyundai Heavy Industries. Assuming a required Internal Rate of Return of 6%, the USD 65 m VLCC should manage to break even with some USD 27,500 per day. Average LIBOR has, since 2002, been below 5%, which using certain earnings assumptions would give owners a profit of more than USD 70 m since delivery in 2004. Using the same calculations, the USD 128 m VLCC will break even at a rate level of USD 42,900 per day and will be launched in an uncertain market in 2010.

 

Contact: Erik Ranheim