Bloomberg -- Demolitions of supertankers, which carry about 20% of the world's oil, are slowing as ship owners accept unprofitable rates rather than write off assets, creating the industry's biggest glut in 29 years.
Scrapping vessels, each the size of the
, will drop 19% to 2.8 million deadweight tons of carrying capacity this year, according to London-based Clarkson Plc, the world's largest shipbroker. The fleet will expand 7.5% to 176.7 million deadweight tons, the most since 1982, as demand for seaborne crude advances 2.8%, the broker estimates. Chrysler Building
Owners are effectively paying clients $1,037 a day to charter vessels on the industry's benchmark route in the single- voyage market, the 1st negative rate since at least 2008.
Frontline Ltd., the biggest operator of the ships, needs $29,700 to break even. Unprofitable voyages may still be preferable to the $22.5 million that BW Maritime Pte Ltd. estimates owners would lose by scrapping tankers 5 years earlier than the standard lifetime of about 25 years.
"Hope springs eternal," said Andreas Sohmen-Pao, chief executive officer of Singapore-based BW Maritime, which has 15 supertankers in its fleet of 105 ships. "Faced with a choice of crystallizing a loss which could have knock-on consequences for financing arrangements and bank loans and so on, people say, well, better to sweat it out and see if something changes."
Owners ordered the most vessels in about 3 decades in 2007 and 2008, when returns exceeded $229,000 a day, just as the world economy entered its worst recession since World War II. Last year's 47% jump in scrapping means just 2% of the fleet is now older than 20 years, with another 10% between 15 and 19 years-old, data from Clarkson show.
Rates for the vessels will average $20,000 this year, the lowest since at least 1997, and $28,000 in 2012, according to Jonathan Chappell, an analyst at Evercore Partners Inc. in
. Frontline, based in New York Hamilton, Bermuda, will report its first annual loss since 2002, according to analysts' estimates compiled by Bloomberg.
Rates went negative yesterday on the
route, the industry's benchmark. Shipping companies accept them because customers still pay for some of the fuel, cutting costs for owners moving vessels into regions with better returns. Saudi Arabia-to-Japan
Frontline is rejecting some charters for the ships, also known as very large crude carriers, because the returns are "nonsense," said Jens Martin Jensen, the Singapore-based chief executive officer of the company's management unit. Jensen said last year he would rather send crews fishing than accept rates below $10,000 a day.
"We are of course looking with amazement at some owners who are fixing voyages at a loss, not even below $10,000 but at a loss, and we are not doing that," Jensen said. "We have some ships now drifting around. I would not say that the crew is fishing, but we have some ships which we are holding back."
Shipping companies typically have a combination of tankers competing for business in the single-voyage market and vessels operating on longer-term contracts at fixed rates.
Forward freight agreements, used to bet on future shipping costs, anticipate rates no higher than $24,501 through 2013, according to Imarex ASA, a broker of the derivatives in
. The accords are tied to the Oslo route and settled against pricing from the London-based Baltic Exchange. Saudi Arabia-to-Japan
Shipping costs are volatile, moving 59% or more in each of the past 11 quarters, according to the Baltic Exchange, which publishes rates for more than 50 maritime routes.
Frontline will report a loss of $12.97 million this year, compared with net income of $161.4 million in 2010, the mean of 19 analysts' estimates compiled by Bloomberg show. Shares of the company fell 60% since December, compared with a 31% decline in the Bloomberg Tanker Index, whose 6 members also operate smaller vessels such as aframaxes and suezmaxes. Supertankers carry about 2 million barrels of oil, suezmaxes about half of that and aframaxes about 690,000 barrels.
Ship owners are also facing the prospect that demand will weaken as economic growth slows. The
, the world's biggest consumer of crude, will expand 2.5% this year, compared with 3% in 2010, according to the median estimate of 66 economists' estimates compiled by Bloomberg. U.S.
Crude traded in
will average $97.22 a barrel in the 4th quarter and $98.46 in the first 3 months of next year, compared with $94.89 now, according to the median estimate of as many as 32 analysts surveyed by Bloomberg. New York
Scrapping jumped 47% to 3.45 million deadweight tons last year as the slump in rates encouraged owners to demolish their oldest vessels. All of those were tankers with hulls made from a single layer of steel. The European Union says they are more accident prone than the latest double-hulled ships.
Single-hulled supertankers now comprise 4% of the fleet, compared with 20% at the beginning of 2010, limiting the potential for more scrapping, according to Chappell, who previously worked for JPMorgan Chase & Co.
Accidents involving single-hulled ships from the Exxon Valdez off Alaska in 1989 to the Erika off France a decade later spurred governments to agree on an IMO ban that began in 2010 and will be phased in over 5 years.
About 78% of oil tankers are demolished in
, the United Nations Conference on Trade and Development estimates. The global fleet of supertankers consists of 567 ships, according to Clarkson. Bangladesh
One alternative to scrapping ships may be converting them into what are known as floating production, storage and offloading units, used offshore to process and store oil. Demand for such conversions is strengthening because oil discoveries are being made offshore, George Saroglou, chief operating officer of Tsakos Energy Navigation Ltd., told investors on a conference call July 28. The Athens-based company has 3 supertankers in its fleet, data on its website show.
The cost of a 5-year-old double-hulled supertanker was last at $80.88 million, compared with as much as $162 million in 2008, Baltic Exchange data show.
"In these poor market conditions, you would normally expect a significant exodus of ships," said Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in
whose recommendations on the shares of shipping companies would have earned investors 22% in the past year. "There's no real scope for that now, and that is a headache owners will have to deal with through continued weak rates." Oslo
--Editors: Stuart Wallace, Steve Stroth
Source: The Sanfransisco Chronicle. 2 August 2011