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Monday, December 11, 2017

Oversupply of VLCCs

The tanker market has been in the doldrums more or less since spring 2010 and rates are now well below operating costs for VLCCs.

 

Tonnage supply.

 

According to Clarkson Shipyard Monitor, 26 VLCCs were delivered by the end of May this year, and another 62 are due over the rest for the year. If some slippage is assumed, and deliveries continue at the same pace as in the first five months, a total of 62 VLCCs will be delivered over 2011 as a whole.

 

So far this year we have recorded 6 VLCCs sold for decommissioning and one for conversion. We still have 23 single hull VLCCs on our records, but these are probably far from fully productive in the market.

 

Some slippage in the shipyards will not really help as long as orders are not completely cancelled. And removals from the market will be limited in the coming years, even if you assume that the first double-hull VLCCs will start leaving the market. The surplus of tonnage will probably continue to increase for the rest of this year and next year. When the market will start to tighten will depend on an increase in demand.

 

The VLCC orderbook stands at just over 30% of the fleet. The World Shipyard Monitor lists 168 VLCCs orders, of which 119 are for independent owners, 19 for state-owned or oil company owners and 30 for Chinese owners. It is conspicuous that Western oil companies have no VLCCs on order. After China, Greek-affiliated owners have the largest orderbook (26).

 

The orderbook is split over 18 different yards. Daewoo is the largest with 28 orders,  Hyundai H.I. has 26 orders and Shanghai Waigaoqiao has 20 orders. Overall, Korean yards have 76 of these orders, Chinese yards 72, Japanese yards 18, and Filipino yards 2.

 

Tanker usage.

 

Tonne-mile demand for VLCCs correlates strongly with Middle East oil production, which in May reached 22.8 mbd, the highest since October 2008. However, the Middle East is the area after China with the biggest refinery expansion plans. According to the Paris-based International Energy Agency (IEA), some 2.3 mbd refinery crude distillation capacity will be added by 2016. This may mean that more products will be exported from the Middle East at the expense of crude oil exports. Also, oil demand in this area has increased by some 0.3 mbd.

 

Nevertheless, according to U.S. broker McQuilling Services, the number of VLCC spot fixtures has increased by some 15% so far in 2011 compared to 2010, mostly AG to Far East +44 fixtures (+14%), then AG to USG/Caribs +27 fixtures (+43%).

 

Looking at the biggest spot charterers in 2010, China and India took five out of the top six places. Clearly the largest was China’s UNIPEC, which increased the number of contracts from 183 to 296 in 2010, according to U,S. broker Poten. Second was India’s IOC with 118 fixtures in 2010; third was China’s PetroChina; fourth was India’s Reliance; sixth was China’s Day Harvest. Chinese operators operate almost 50 VLCCs today compared to 88 by Japanese operators and 37 by Tankers UK.

 

However India’s increased export refinery has probably shortened the distances for the VLCC market. Crude oil is exported short-haul to India and products are exported from India at the expense of crude - in particular from the Middle East.

 

Shell was the seventh biggest VLCC spot charterer, and the largest Western one, with only 62 VLCCs taken. Exxon Mobil came in at number 11 with 54 spot contracts, according to Poten.

 

The VLCC surplus is not immediately apparent as there is no lay-up. However, partly due to the high fuel prices, a great deal of tonnage is being kept out of the market due to the reduced speed of many tankers.

 

London broker Gibsons has started to quote both the design speed and slow steaming time charter equivalent assessments for all representative vessel sizes, and their calculations (below) clearly demonstrate how much earnings can be increased by slow steaming.  

 

 

Design speed

Slow steaming

Difference

2nd half 2010

14,000

21,000

 7,000

1st half 2011

12,750

23,500

10,500

 

Contact: Erik Ranheim