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

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% above the price of scrap.

The cost of 15-year-old tankers fell 48% to $23.5 million this year as scrap values advanced 3% to $17.25 million, the narrowest gap in at least 5 years, according to data from the world’s 2 largest shipbrokers. Owners may break up 5% of the fleet within 18 months, the most in 9 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% jump to $12,817 a day in 2013 compared with the average so far this year. That’s still 43% of what Frontline Ltd., the biggest operator, says it needs to cover costs. 16 months of unprofitable charters and falling ship values are lowering expectations from as recently as 3 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%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%to $98,323 the following year, its data show.

Crude Carriers:

Single-voyage rates for very large crude carriers, hauling about 20% 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% 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 4 decades in 2007 and 2008, when returns in the spot market were 14 times higher than now. Hamilton, Bermuda-based Frontline will report its 1st annual loss in 9 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 7 years, according to data from Galbraith’s. That’s 65% below Frontline’s break-even level.

China’s economy accounts for about 10% of oil consumption and will expand 9% 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% 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 6 types of containers fell 38% since the start of April, data from the Hamburg Shipbrokers’ Association showed.

Frontline Stock:

Shares of Frontline slumped 77% 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% 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% of all crude and oil-product tanker scrapping in 2009, followed by Pakistan with 10% and China with 8%, 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

Source: Bloomberg.com. By Alaric Nightingale 15 November 2011

http://www.bloomberg.com/news/2011-11-15/oil-tanker-rates-seen-rising-as-scrap-values-speed-up-demolitions-freight.html

Scrapping of older vessels to intensify in coming months, says Braemar Seascope:

So far this year, demolition of older vessels has been feverish, in an attempt by ship owners to help alleviate the tonnage oversupply pressures that the global shipping market has been dealing with, in almost every shipping trade, from dry bulk to tanker.

According to Rodney North, Braemar Seascope Director in Demolition, the level of scrapping activity in the dry bulk segment so far this year, is 400% more than in 2010, while in the tanker sector levels are approximately 25% lower than in the previous year.

But, as Mr North says in an interview with Hellenic Shipping News Worldwide, the size of the orderbook and the number of vessels delivered from shipyards around the world has been such, that the rate of scrapping has done little to diminish the global fleet, thus applying pressure to freight rates. As he says, scrapping activity must continue to remain high and increase in the coming months and years, in order for the shipping industry to recover and return to a healthier balance between demand and supply.

How has the demolition activity been progressing so far this year both in the tanker and dry bulk segments?

• Bulker - 23.6m dwt sold for demo in 2011, 400% higher than in 2010 at same point. 
• Tanker - 8.25m dwt sold for demo in 2011,  25% lower than in 2010 at same point.

In 2011 the demolition market has been dominated by sales of dry bulk vessels with a notable number of larger lightweight vessels i.e. panamax and capesize vessels being sold for scrap.

For the most part activity relating to tanker scrapping has been subdued compared to the number of dry vessels being sold for demolition. This is partly because the vast majority of single hull tankers have already been phased out.

Over the last few months we have seen a greater supply of overaged double hull tankers coming onto the market, especially late 80s and early 90s built MR and Aframax tonnage, although this trend is likely to spread to all tanker tonnage.

Overall this year has seen prices rise steadily with small peaks and troughs for both wet and dry tonnage respectively, with levels well in excess of US$500/Ldt being maintained throughout the majority of the year.

Tanker demolition has been somewhat more complicated this year with new regulations being imposed in Bangladesh whereby all tankers have to be gas free for man entry and hot works (the same as in India). Pakistan has been the main beneficiary of this new regulation with many owners unwilling to undertake gas free cleaning for hot works at their expense prior to arriving at the final breaking port. Many of the cash buyers have been left having to purchase vessels on an ‘as is’ basis, cleaning the vessel at their cost and expense before undertaking the final voyage to India or Bangladesh to satisfy the needs of the buyers there. The vessels that are gas free for man entry and hot works have seen a premium in terms of the prices being offered this year.

Do you think these levels of activity are enough to help alleviate oversupply pressures in both markets?

No. According to our Research Department this year will see a net bulk carrier fleet growth of 10% compared to a 6% demand growth, while the figures for tankers are at 6% and 2% respectively.

As it stands given the current number of newbuilding deliveries and those projected for the next two years, even with large number of vessels being scrapped the global fleet is still set to grow. Supply is still exceeding demand and this will continue unless we see a significant increase in the amount of vessels being scrapped or we see a marked increase in newbuilding cancellations.  The question also remains as to whether the demolition market can sustain increasing numbers of scrap vessels, and the possibility of oversupply of scrap tonnage leading to a fall in prices.

Do you expect that pressure from a tonnage supply point of view will improve next year?

No.  As far as bulk carriers are concerned we anticipate a net fleet growth of 8%-10% as against a steady demand increase of 6%

In terms of scrap prices offered, would you say that they are attractive to ship owners or not?

Yes.  For example if selling today, owners could expect to realise US$16million to $18m for a single hull VLCC and US$21m-$22m for a first generation double hull VLCC (the latter having a higher lightweight and therefore higher price). Considering this against the background of owners facing negative spot market earnings on the major trading routes, it is clear there is pressure on potential sellers to seriously consider taking advantage of the current strong demolition levels. Owners purchasing older tonnage are naturally using the current demolition value of the vessel as the starting point in terms of valuing the vessel.

This year has seen historically very strong demolition prices, with prices now around US$500/Ldt being offered for all tonnage types for delivery on the Indian subcontinent.  Combined with falling second hand values and depressed freight rates, demolition values should be considered attractive for Owners with potential scrapping candidates.

How has the situation regarding the ban of demolition activity in Bangladesh been affecting the market so far?

Over the past year Bangladesh has seen numerous closures and resumptions in shipbreaking activity relating to moves by the High Court and the Bangladesh Environmental Lawyers Association relative to the implementation of improved health and safety procedures and recycling regulations. Overall the impact on prices has not been negative, with Pakistan and India remaining aggressive even in the periods of Bangladesh’s absence. The main effect of the various openings and closures of the Bangladesh Shipbreaking market has been to create volatility with cash buyers and breakers speculating on price against anticipated demand fluctuations. In the past when Bangladesh has been unable to purchase vessels for long periods, we have seen China absorb some tonnage finishing in the Far East, as Bangladesh was removed from the competition,  and India being that much further to ballast to with high bunker prices. However, more recently the very firm prices available from India and, to a lesser extent Pakistan, have negated the influence of Bangladesh’s absence with China simply being unable to compete on the larger lightweight vessels.

Do you think that demolition activity will be more intense in the months to come?

In short YES. With the outlook for global trade growth recently worsening and supply still far surpassing demand, it would seem inevitable that as more and more vessels fail to make a profit or even break even, owners could be left facing the alternatives of cold lay-up or demolition.

Source: Hellenic Shipping News Worldwide. By Nikos Roussanoglou. 7 November 2011

http://hellenicshippingnews.com/index.php?option=com_content&view=article&id=56459:scrapping-of-older-vessels-to-intensify-in-coming-months-says-braemar-seascope-&catid=1&Itemid=61

Steel prices to bring down demolition values?

Average demolition values in China and the Indian subcontinent have come under  pressure  recently,  with  $/LDT  values  posting  a  7.3%  decline  since mid-October. Although global steel prices have gained 4.8% since January, prices have shed 13.9% since reaching a YTD high in March.  

Given  the  price  discount  for  steel  reclaimed  via  tanker  demolitions  in locations  with  cheap  labor  relative  to  global  steel  prices,  demolition  values have  been  less  impacted  than  global  steel  prices;  average  China  and  Indian subcontinent $/LDT values have only lost 2.5% since March.  

Several global steel production facilities are reportedly idling production as the  European  sovereign  debt  crisis  continues  to  stoke  uncertainty  in  global markets.  Accordingly, the gap between global steel price indices and demolition values could narrow, mitigating greater further $/ldt losses.

Despite  a  more  limited  pricing  gap,  even  minor  $/ldt  losses  may  present fresh  downside  risk  for  tanker  markets  as  the  recent  progression  to  newer, double  hull  tanker  demolition  sales  remain  one  of  several  key  factors  to alleviating overcapacity in the sector.  

During  October,  double  hull  tonnage  accounted  for  78.1%  of  the  total

tanker  tonnage  demolished  –  up  significantly  from  an  average  of  18.0% during  the  first  3  quarters.  Over the past two weeks, however, demolition sales  activity  has  declined  markedly,  with  just  one  unit  reported  as  sold  to such buyers.

Reported Tanker Demolition Sales -

WEEK 43:

INDIA: 

“SEBAROK SPIRIT” 95,649/93 - 15,661 LDT  

- Sold for $481/LDT basis as is, Singapore including 400 

MT bunkers ROB. (Double Hull) 

WEEK 44:

NO tanker demolition sales were reported for week 44.  

Source: Hellenic Shipping News (Sourced from Charles R. Weber Weekly, www.crweber.com). 6 November 2011

http://download.hellenicshippingnews.com/pdf/WeberWeekly44-11.pdf