A Fair Wind for Tankers?

The tanker market in the 2nd half of 2007 was quite peculiar. Weak summer rates carried on through October and most of November. Demand did not pick up seasonally and the fleet continued to expand on the back of new deliveries and virtually no demolition. As late as mid November VLCCs made hardly more than 25,000 $/ day, and on some routes earnings barely covered much more than operational costs. At the end of the month, due to several factors, freight rates rocketed reaching fabulous levels for a brief period; since mid-December these came off substantially, but as of end January they are still at acceptable levels. During the same period, we witnessed a trend whereby middle-aged SH tankers gained value. From May until December a 1989/90-built VLCC gained about US$ 10 million and a 15-year-old vessel rose about US$ 16 million - or about 25% to 45% up during the 2nd half of 2007. These price increases were, of course, not driven by the tanker freight market, but were rather the result of a strong buying interest for conversion into VLOC or FPSO.

With the current nervousness in the dry bulk market and the enormous size of the dry bulk order book in mind, we have the impression that interest in converting tankers into ore carriers is fading fast and that pricing of such units will decline in 2008.

The terrible "Hebei Spirit" accident off South Korea in December was expected to have some bearing on SH tankers calling at South Korean ports. However, it is only recently that we have seen what measures have actually been taken: the Korean Government has put the cutoff date for SH tankers forward to 2011 (although they maintain a loophole for vessels with CAS 1 certificates), and GS Caltex has decided to ban all SH tankers in 2009. As South Korean charterers are, by far, the largest users of SH tankers this must be considered a serious blow to owners of such vessels (particularly VLCCs). Following up, and based on a recent large oil spill, the Philippines have followed suit and put a ban on all SH tankers already in April this year. Although the Philippines represent a much smaller market, the move is significant. Adding to this, we observe that Japanese shipowners have quietly let go of their SH tankers over the past year. Out of the about 60 VLCCs running on long term charters to Japanese oil companies only five are SH. Japanese shipowners have sold some 15-20 SH VLCCs over the past couple of years, and with the current newbuilding programme, we assume that it is only a matter of (short) time before the number of SH VLCCs running on long term charters to Japanese oil companies will be zero. Therefore, we believe it is only a question of time before SH tankers are banned in Japan as well. Meanwhile, we see that the freight spread between SH and DH tankers in the MEG has increased significantly over the past two months. During the first 10 months of 2007, the spread was on average about 12 WS points whereas the average spread during the last two months was about 25 WS points indicating a great reluctance to charter SH VLCCs, or, at the very least, a strong preference for DH vessels. In light of the recent actions taken by both authorities and individual companies, the trading opportunities for SH VLCCs have been sharply reduced.

From the table below it can be observed that South Korea, Japan, and the Philippines constituted about 40% of non-DH employment during the first nine months of 2007. The tightening of chartering regimes and the 105 VLCCs scheduled for delivery in 2008/09 indicate, as we see it, that SH VLCCs will fade into oblivion during the next two years. At some point in time during the next two years, we expect that most charterers will see the right moment for banning SH tankers, especially since such a move will probably do them little if any harm.

We believe that the next two years will not be as bad as earlier anticipated and that the upturn in demand expected in late 2009 and 2010 could very well turn out to be a boom.