Thursday, March 19, 2009
Tankers: What rates does the market need to cover operational costs?
Thursday, 19 March 2009
Tanker owners are faced with various challenges during 2009, having experienced a fruitful 2008, one of the best years ever in the industry. The question that is maybe crucial to the eyes of the majority is not so much where the freight market will go, rather than where it needs to go for everyone to be happy. In other words, what rates would be enough to sustain a shipping company involved in the tanker business. One of those attempting to answer this question was the research team at Gibson, which in its latest weekly report said at VLCCs ordered in the mid 1990s at $82-84 million would require around $30,000/day earnings on a timecharter equivalent (tce) basis to cover these ‘capital’ costs. In addition to this, fixed operating costs (crew, maintenance, repairs, overheads etc.) have to be covered, which we have taken at $11,500/day for a VLCC (this will vary between owner). On this basis these vessels need to earn just above $40,000/day to cover full costs.
To come to this conclusion, Gibson has taken the assumption that the vessel was ordered from the yard at the prevailing newbuilding price, that it is still with the same owner, that the target rate of return is 10% per annum over a 15 year period and that there is a $5 million residual value left on the tanker. Similarly, on the above basis, for VLCCs ordered between 1998-2004 newbuilding prices were lower and in the range $65-75 million, which means that these vessels need $35,000-38,000/day to cover full costs. “Given that VLCC spot earnings have averaged $73,000/day over the past 5 years and last year averaged $100,000/day, the financial returns to these owners have been spectacular. Even though VLCC newbuilding prices for orders in 2005/06 and delivery in 2007/08 increased sharply to $125 million and our assumed full costs for these vessels hit $55,000/day, the spot (and timecharter) market still more than covered this” Gibson said.
The issue now is that last year a massive 103 VLCC orders were placed at around $155 million each. On the same assumptions as above, these vessels need around $67,000/day to cover costs. They are most likely to become “collateral damage”, at least as long as the global economical crisis persists. In a recent report, transportation consultants McQuilling Services said that crude oil tanker demand is expected to show no increase this year. The consultant says that there was firming demand during the fourth quarter of 2008, “rather surprising” as all other economic and market indicators were pointing downwards. The increase however was in the aframax and panamax sectors while VLCC demand, dropped suezmax demand growth was “relatively flat”.
Based on an International Energy Agency forecast of a 1.1% drop in oil exports McQuilling does not expect liftings to increase in 2009. It concludes that the “likelihood of increasing tanker demand in 2009 remains poor, in our opinion”.
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