Oil-Tanker Rates Seen Rising as Scrap Values Speed Up Demolitions: Freight

By Alaric Nightingale - Nov 15, 2011 7:01 AM GMT+0700

Oil-tanker companies may demolish the most ships since 2003, lifting charter rates from their lowest in at least 14 years, as values of older vessels trade 36 percent above the price of scrap.

The cost of 15-year-old tankers fell 48 percent to $23.5 million this year as scrap values advanced 3 percent to $17.25 million, the narrowest gap in at least five years, according to data from the world’s two largest shipbrokers. Owners may break up 5 percent of the fleet within 18 months, the most in nine years, said Michael Pak, an analyst at Clarkson Capital Markets LLC in Houston.

While scrapping would reduce the glut and raise rates, it won’t be enough to make ships profitable. Freight derivatives, traded by brokers and used to bet on future rates, anticipate a 68 percent jump to $12,817 a day in 2013 compared with the average so far this year. That’s still 43 percent of what Frontline Ltd., the biggest operator, says it needs to cover costs. Sixteen months of unprofitable charters and falling ship values are lowering expectations from as recently as three months ago, when analysts anticipated fewer demolitions.

“Owners’ perceptions are changing as we speak,” said Charlie Fowle, chairman of London-based shipbroker Galbraith’s Ltd. “Even those who are more bullish will think it’s not worth buying 15-year-old ships if this market continues.”

Owners scrapped 8 percent of the very large crude carrier fleet in 2003, according to Clarkson Research Services Ltd., a unit of Clarkson Plc, the world’s biggest shipbroker. Rates surged 87 percent to $98,323 the following year, its data show.

Crude Carriers

Single-voyage rates for very large crude carriers, hauling about 20 percent of the world’s oil, averaged $7,627 a day this year, compared with $32,006 in 2010, according to the London- based Baltic Exchange, which publishes costs along more than 50 maritime routes. Rates settled at $12,200 yesterday. Longer-term contracts are also unprofitable, with a 15-year-old tanker earning $16,000 a day on a one-year accord, according to London- based Clarkson.

Vessels in service since 1996 or earlier comprise 14 percent of the global fleet, which expanded 11 percent to 554 ships since the end of 2008, according to data from Redhill, England-based IHS Fairplay. Owners ordered the most new vessels in four decades in 2007 and 2008, when returns in the spot market were 14 times higher than now. Hamilton, Bermuda-based Frontline will report its first annual loss in nine years for 2011, analyst estimates compiled by Bloomberg show.

Double Hulls

Owners will probably start demolishing older double-hulled tankers before the end of this year, said Jens Martin Jensen, the Singapore-based chief executive officer of Frontline’s management unit. It would be the first time for the vessels, built with an extra layer of steel to reduce the risk of spills, according to IHS Fairplay. Frontline’s fleet includes three double-hulled tankers built in 1995.

Scrapping may be postponed should earnings improve. Daily rates on the benchmark route to Japan from Saudi Arabia jumped 19-fold to $10,479 last week after oil companies and traders booked the most tankers to load Persian Gulf cargoes in at least seven years, according to data from Galbraith’s. That’s 65 percent below Frontline’s break-even level.

China’s economy accounts for about 10 percent of oil consumption and will expand 9 percent next year, or more than twice the speed of global growth, according to the International Monetary Fund. World crude demand will rise by about 1.3 million barrels to 90.5 million barrels a day in 2012, the Paris-based International Energy Agency estimates. The gain is equal to about 237 additional cargoes for the largest tankers.

Vessel Speeds

Rising returns may encourage shipping companies to sail faster, effectively increasing the number of ships competing for business. The average VLCC is proceeding at 10.4 knots, compared with as much as 12.2 knots in 2008, according to data compiled by Bloomberg. Owners cut speeds when rates decline to limit fuel costs.

Freight derivatives indicate the past week’s gains won’t be sustained. While the December contract trades at $15,117 a day, 24 percent more than now, rates are projected to decline for the next few months to $8,245 by April, according to data from Marex Spectron Group, a London-based broker of the contracts.

The slump in tankers is being mirrored in ships carrying other commodities and manufactured goods. Daily rates for capesizes, hauling iron ore and coal, averaged $13,839 this year, below the $20,000 they need to break even, Baltic Exchange data showed. An index reflecting charges for six types of containers fell 38 percent since the start of April, data from the Hamburg Shipbrokers’ Association showed.

Frontline Stock

Shares of Frontline slumped 77 percent this year in Oslo, reducing its market value to 2.66 billion kroner ($466 million) from 27.7 billion kroner in June 2008. The company will report a net loss of $112.7 million for this year, the worst result since at least 1996, according to the mean of 19 analyst estimates compiled by Bloomberg. The MSCI All-Country World Index of equities retreated 8.1 percent since the start of January.

Double-hulled tankers that were 15 years old were sold for as much as $114 million in 2008, according to data from London- based Simpson, Spence & Young Ltd., the second-largest shipbroker. The incentive to demolish the ships now may be higher than suggested by the narrowing premium to scrap.

Clarkson’s assessment of the demolition value is based on single-hulled tankers. Those with double hulls would be worth more because they yield more steel, said Calum Kennedy, an analyst at the shipbroker’s research unit in London. The vessels also need surveys of seaworthiness every five years, which can cost $1 million to $2 million, potentially adding to costs for buyers of older transports, said Pak in Houston.

Tanker Scrapping

Bangladesh handled 78 percent of all crude and oil-product tanker scrapping in 2009, followed by Pakistan with 10 percent and China with 8 percent, according to the latest data from the United Nations Conference on Trade and Development.

Anyone buying an older tanker may also have more difficulty in winning cargoes. Oil companies are increasingly favoring newer vessels, which tend to be better maintained, said Per Mansson, the managing director of Norocean Stockholm AB, a shipbroker in the Swedish capital.

“Owners have a challenging economic decision ahead of them,” said Pak. “If your view is that we are going to be in this situation for the next couple of years, if your horizon is a two- to three-year outlook of depressed earnings, the decision becomes more and more compelling to scrap the ship.”

To contact the reporter on this story: Alaric Nightingale in London at anightingal1@bloomberg.net

To contact the editor responsible for this story: Stuart Wallace at swallace6@bloomberg.net