VLCC rates still struggling below operating cost level
A glut of vessels and softening oil demand are set to deepen an earnings slump in the Middle East crude tanker market, with little hope of a major recovery in rates in the coming months, analysts say.
Industry association INTERTANKO warned last week that the sustainability of the industry was under threat if earnings remained below operating cost levels for an extended period.
Average earnings for very large crude carriers (VLCCs) on the benchmark Middle East Gulf to Japan route have hit record lows in recent months, deepening profitability concerns.
“The current VLCC market is in dire straits,” said Peter Sand, chief shipping analyst with ship association BIMCO.
“Demand has been positive, with a record of fixtures, but the fundamental imbalance is handing the negotiation power over to charterers as available vessels outnumber available cargoes.”
The International Energy Agency said on Wednesday world oil consumption would grow less quickly than expected this year and next as the pace of economic growth slows. OPEC also downgraded its global demand outlook the same day.
“In order to reverse the sluggish earnings going forward, owners either have to start larger scale slow-steaming or initiate widespread idling/laying up of vessels,” Sand said.
Average VLCC earnings turned negative on Aug. 1 for the first time since the Baltic Exchange started collating earnings equivalent data in 2008. They have been in positive territory for only six sessions since then and have stayed negative since Aug. 26.
Average earnings per day are calculated after a vessel covers its voyage costs such as bunker fuel and port fees. VLCC operating costs, including financial costs, are estimated at around the $10,000 a day level. Average VLCC earnings reached -$4,897 a day on Wednesday.
Consultants MSI forecast average spot earnings for the Baltic’s TC3 route will reach $3,500 a day by December, inching up to $4,100 a day by March next year.
“Prospects for the VLCC market will remain bleak over Q4 and into Q1 2012,” MSI said. “The latent spare capacity in the market is plain to see, and it would take a large upswing in demand and refinery throughput to engender any substantial upside in rates.”
Another barometer of worsening prospects in the market has been second-hand VLCC ship values. Last week a 1999-built VLCC tanker sold for $27.5 million, down from a sale in August of a 2000-built tanker for $36 million, brokers said.
A five-year VLCC vessel was priced at $67.87 million this week, down by $5.18 million in value from the previous week, Baltic Exchange data showed.
“With each sale that is concluded, another chunk is taken out of the previous benchmark value,” HSBC said in a report.
VLCC rates have also been hit by the end of a trading play that involved storage of millions of barrels of crude on tankers at sea. The amount of this stored oil has steadily declined to around 2 million barrels, which equates the capacity of a single VLCC. That compares with 2009, when floating storage employed the equivalent of 50 tankers, or about 10 percent of the VLCC fleet at the time.
BIMCO said the active total crude tanker fleet had grown by 4.8 percent so far this year. Out of the total deliveries, 45 new VLCCs had been delivered so far, with the overall crude tanker fleet set to grow by 7.6 percent in 2011. Sand said 40 to 50 VLCCs would need to be idle for rates to return to a “sustainable level from the present doldrums”.
“The trouble is, however, that the winter market is getting too close now. and owners are unlikely to dare missing out on potential exciting fixtures related to a winter spike,” Sand said.
“Without the prospect of idling or laying up vessels in coming months, the adjacent downside to non-action is a continuing of the present poor earnings.”
Source: Reuters