With oil demand still not rising quickly enough in order to absorb the extra tonnage, it seems that the VLCC tanker market is set for yet another dismal year. In its latest report, Poten & Partners noted that VLCC sector earnings continue to languish as recent rate movements broke through previously estimated seasonal support levels. TD1 spot rates have fallen into the teens, while other Baltic VLCC routes have also dropped precipitously in the new year. Furthermore, time charter rates are well below our assessment of the vessel’s breakeven level of approximately $28,700, despite the fact that newbuild prices have fallen to $90MM" Poten said.
The analyst's report added that "there have been a few notable orders of VLCCs thusfar in 2013, and in a move that we did not previously foresee materializing this soon, the VLCC orderbook has begun to rebound, reaching 83 vessels or approximately 13.5% of the total fleet size. Still, the question remains: why do large-scale orders continue in the face of persistently dismal earnings? The desire to “buy low” and be prepared for a scenario in which rates recover is enabled via continued credit extension by export-import lending entities controlled by governments that may view shipbuilding demand through the lens of domestic employment. For example, a representative of the Export-Import Bank of China was quoted by Reuters as saying, “no matter if the market is good or bad, as a policy bank we will continue our efforts in providing more support for the (Chinese) shipping sector” when explaining why the bank anticipates increasing lending by as much as 20% in 2013" Poten said.
It added that "it is necessary for owners to be extremely disciplined in order for the hangover of the last decade’s vessel procurement to subside and for the supply/demand dynamic to reach levels that support more robust earnings. While the pace of deliveries slowed in 2012, the current orderbook suggests that deliveries should pickup again in 2013. Given modest ton-mile demand growth projections, the demand side of the equation would not provide the impetus for major rate growth. In turn, we do not forecast fleet utilizations reaching aforementioned levels in the near term unless consensus macroeconomic growth and crude oil consumption forecasts are well below the mark. These forecast utilization levels and associated time charter rates would likewise be negative for earnings in the spot market as the two are closely correlated" Poten said in its analysis.
It concluded its argument by noting that "the age of the fleet, coupled with relatively low newbuilding prices, has no doubt given way to replacement activity as owners try to lower the age profile of their fleet in a down market. Other owners, drawing on their experience of the boom years that have followed previous busts, view the current earnings environment as an opportunity to be well-positioned for the next cycle by having a larger fleet in a higher margin environment. This has the potential to become self-defeating, preventing a recovery in utilization levels. Owners should be wary of speculative purchases, which could hinder this possibility for an even modest rate recovery" Poten said.
In a separate report early in the week, Drewry Maritime Research noted that "the impact of falling rates has been amplified by bunker prices rising in line with international crude prices. VLCC earnings on the benchmark Arabian Gulf-Far East route plunged by 16% to $13,000pd in January.
However, voyages from West Africa to China provided some respite to owners with earnings on the West Africa-China route increasing from $14,300pd to $17,000 during the month. Strong Chinese economic growth, the start-up of new refineries and disruption to supplies from South Sudan, Yemen, and Iran boosted the country’s demand for West African shipments. This might help to offset the loss of the US market, which requires less imported crude because of the shale oil boom.
Increased demand from Asian markets, notably China, India and Far Eastern countries, will be the demand drivers for the VLCC tanker trade. Drewry predicts that the market is going to see more crude moving eastwards from the Middle East and also from West Africa, which will boost tonne-mile demand for tankers" Drewry concluded.