Tanker owners must keep away from ordering new VLCCs for at least the next two years despite crashing prices, Arctic Securities says.
Analyst Erik Nikolai Stavseth suggests VLCC newbuildings will only break even at best during the next four years.
In a note to clients Stavseth says the ordering of only five new VLCCs this year, of which two are linked to long-term charters, suggests owners have come to their senses and realised abstinence is the only way to seed a recovery.
“Given our outlook on the crude tanker market for the next two years, ordering a new vessel would be counter to our advice,” he said.
“However, the majority of the vessels ordered in 2010 are due to hit the water in 2012 and 2013, a situation that prompts us to foresee a longer slump in freight rates than what we did a year ago.”
Stavseth believes the tanker market will improve in the final quarter of 2011, but warns the change of rates reaching profitable levels is low.
He is now forecasting VLCC spot rates of 20,000 per day this year, down from $23,000. His tip for next year has been downed to $19,000 daily from $22,500.
Stavseth says newbuilding prices have held up surprisingly well given the crash in rates. But he feels this is about to change.
“A VLCC newbuilding is quoted at $101m at first-class yards, but as the orderbooks are emptied we think yards will be willing to build vessels as lower prices," he said.
“We have already heard market buzz of low 90s being contemplated as a more fair level.
“Given our outlook, we expect vessel values to exhibit a falling trend going forward.”
The analyst estimates the average cost of a VLCC newbuilding delivered this year is $133m, up from $131m last year and $124m in 2009.
He explained: “Based on our trading life assessment, a vessel costing $130m will require an average freight rate over life of vessel in the range of USD 30,000 per day just to break even on the investment.
“In order to yield 10% on total capital, the average freight rate will have to be $44,000 per day.
“Although three and five year time charter rates are in around $30,000 per day, owning a VLCC newbuilding over the next four years is going to be breakeven business at best.”