The ships are underemployed thanks to growth in the world tanker fleet
Anyone looking out over the Bay of Algeciras by the Rock of Gibraltar over the next few months can expect to see plenty of ships. The bay is a popular spot to moor oil tankers – Algeciras’s busy oil refinery is nearby and the bay’s strategic location makes it an excellent place for temporarily idle ships.
The ships are underemployed thanks to growth in the world tanker fleet that far outstrips the 1.3 per cent world oil consumption growth projected for this year and the 1.8 per cent projected for 2012.
Figures from Fearnleys, an Oslo-based shipbroker, put this year’s growth in the world fleet of very large crude carriers – the largest commonly used kind – at 14 per cent if none is scrapped. The figure for 2012 should be 9 per cent.
The question is how many of the world’s tanker owners can withstand the prolonged slump in earnings that the glaring imbalance is producing.
Andreas Sohmen-Pao, chief executive of BW Maritime, part of his family’s Hong Kong-based BW Group, says the market is “exceptionally weak”.
“Earnings are pretty close to zero, while break-even rates are close to $30,000 a day,” he says.
One industry adviser suggests more than one large operator faces financial collapse – either filing for bankruptcy protection or a painful restructuring – if the downturn were to last as long as the 12 to 18 months that many expect.
“Just look at the accounts of the listed companies,” he says. “You can see that their cash positions are deteriorating very, very fast.”
Yet not all operators are exposed to the storm’s full force. While some operators prefer to profit from the sharp earning spikes of the short-term spot market and ride out its long troughs, others put some or all their vessels on long-term charters. Many such vessels continue to earn profitable rates.
Listed tanker operators with low spot market exposure emphasise how high a proportion of their fleet’s future business is covered by long-term charters. Bruce Chan, chief executive of Teekay Tankers, says 55 per cent of his company’s vessels’ time during the next 12 months is covered by already signed charters.
“That covers off all of our costs, even if the other ships carry nothing,” he says.
Companies’ debt burdens and their obligations to pay for new ships ordered at the height of ship earnings – and shipyard prices – in 2008 are also critical factors.
Mr Sohmen-Pao says his company ordered no new vessels after 2007. “As prices started to get very high, we felt it was hard to justify investing in new tonnage,” he says.
Yet there are many vulnerable companies. General Maritime, the New York-listed tanker operator founded by Peter Georgiopoulos, the Greek-American shipping entrepreneur, was forced this year to seek a $200m cash injection from Oaktree, the private equity group.
It was struggling to cope with the heavy debt burden associated with its $620m purchase in June last year of seven tankers from Metrostar Management Corporation. More than half its ships are exposed to the spot market, according to figures published in July when it announced its first-half results.
Given the nature of shipping’s sharp swings, executives at the strongest companies are already sizing up the potential benefits of any forced sales of companies or ships.
John Fredriksen, founder of Frontline, the largest listed crude oil tanker operator by fleet size, told the Financial Times in June last year that he was holding billions of dollars in liquid assets to seize opportunities formed by any downturn.
Jens Martin Jensen, Frontline’s chief executive, suggests that, while the time to spend those assets may not have arrived, it is approaching.
“Normally you get the best deals in bad markets,” Mr Jensen says. “I think there are some good opportunities now. There are many more coming after the summer.”
Source: The Financial Times
