VLCC tanker owners are probably scratching their heads with the mess they’re found in, as the number of available vessels is so big, that it can’t be absorbed by the market by no means whatsoever. According to an analysis from London-based shipbroker Gibson, it is rare in a market that the underlying level of trade can increase by around 10% in less than one year and at the same time returns collapse to near non-existent levels, but this is what has happened to the Middle East VLCC sector.
Gibson mentioned that «over the past nine months Middle East OPEC production has increased by 2 million b/d (plus 10%) and yet VLCC tce earnings on TD3 (at 15 knots) have fallen from $30,000/day to sub-zero. Even if vessels slow-steam, the earnings are only just covering fixed operating costs (of around $11,000/day). So, despite more Middle East crude cargoes, the simple answer is “there are far too many VLCCs” and worse still, there are a lot more to be delivered. How ever you dress this up, it is disastrous for VLCC owners. At the same time, it is not in charterers long term interests if returns to owners are so low it threatens their operations” said the shipbroker.
It went on to mention that «there are no easy answers to these fundamentals, but either demand has to rise even faster or somehow owners have to remove tonnage. On the demand side, more long haul Mid East trade to the West would help, but with the US and European economies “looking down the barrel of a gun” this cannot be relied upon. This means turning to supply, with slow-steaming a first step. Although slow-steaming on the laden leg is limited because any lengthening of voyage time incurs a cost to the charterer on the capital tied up, these constraints are not there in the ballast. At around 9 knots, a VLCC in ballast consumes less than 30 tons/day, compared with around 55 tons/day at 13 knots. In this case there will be a cost saving of around $200,000 on a VLCC ballast leg from Japan to the Middle East, BUT the more important aspect is that at these super-slow speeds there will be an effective cut in supply of some 10-15% and so rates/earnings will be higher. On paper this is a “no-brainer”, but in the real world it is not quite so easy. There is always the temptation to chase a cargo from some way out; also, if an owner operates at these super-slow speeds it will help everyone else – even those that don’t engage in the practice. Nonetheless, if enough owners stick to slow-steaming it will help their market. The challenge then will be to resist speeding up in a rising market, thereby removing the very support created by slow-steaming. However, in the current market owners have to do something.
Beyond slow-steaming, there is the option to lay-up. At the moment it is too early to take tankers out on a semi-permanent basis, with the concern about losing approvals and missing the chance of a market pick-up, especially in the fourth and first quarters. If there is no significant market upturn over this winter, then lay-up will be a much hotter topic in the second quarter of 2012. Either way, VLCC oversupply is something we are likely to be talking about for some time to come” concluded GIBSON.
Meanwhile, losses are piling up for owners of supertankers. According to a Bloomberg report VLCC on the benchmark Saudi Arabia to Japan route are losing more than $4,500 a day. Rates have been on the negative side since late August. According to a quote from Martin Korsvold, an analyst at Pareto Securities AS in Oslo, “the excess supply limits the probability of any short term increase in rates”. Global demand for supertankers will expand 5.2 percent this year to 144.3 million deadweight tons, according to Clarkson Research Services Ltd., a unit of Clarkson Plc, the world’s largest shipbroker. The fleet will swell almost twice as fast, expanding 9.9 percent to 176.9 million tons, it estimates.