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Impact of scrapping of single-hull vessels

Sep 11, 2007

Following some big accidents in seas, environmental regulations have hardened for single hull tankers. The International Maritime Organistaion (IMO) has stipulated that all single hull ships be scrapped by 2010. According to Teekay Shipping, at the end of 2006, close to 25% of the world tanker fleet was single-hull. With such a significant part of tanker fleet going out of supply, will it lead to strengthening of tanker rates? Let us find out. Tanker rates, the current situation: While 2005 was a strong year for the tanker markets, high energy prices and an unusually warm winter in the northern hemisphere led to a mere 1% YoY growth in oil demand in 2006, against a 5% YoY growth in world tanker fleet. As far as 2007 is concerned, though tanker rates were healthy in the first half of the year, they have fallen by nearly 50% till date. This has been mainly on account of lower oil demand and increase in world tanker fleet. See chart below.

Impact of scrapping on various single-hull vessels on various segments

Very large crude carriers (VLCC): At the end of 2006, there were 502 VLCCs (of which nearly 65 % were double-hulled) in active service worldwide, compared to 481 in 2005. Currently, 172 vessels are on order (nearly 35 % of the current fleet), of which a majority is for delivery in 2008 and 2009. The volume of modern double-hulled tonnage will match that of the world fleet existing in 1998 only by the end of 2008. Hence, progressive enforcement of international regulations aiming to eliminate all single-hulls by 2010 will have a positive impact on VLCC rates.

Suezmaxes: At the end of 2006, the world Suezmax fleet comprised 352 units, of which 78% were double-hulled, compared to 335 ships at the end of 2005. 104 new units (a record number) were ordered, of which a large majority should join the fleet in 2009. The older ships are mostly dispersed over different geographical zones and no longer play a major role on the market, in contrast with the VLCC category. At the end of 2006, the tonnage of double-hull Suezmaxes is practically the same global tonnage (all types together) as in 1998 and even 2002. As far as freight rates are concerned, only a constant increase in demand and a lengthening of voyages will be able to compensate for the increase in the fleet. Although such a scenario seems probable from now until the end of 2008, one can nonetheless fear that the 54 ships on order for delivery in 2009 and the 23 already signed up for 2010 might cause an imbalance in the long term, posing a problem for owners.

Aframaxes: The popularity for this size of tankers remains particularly strong, since it numbers 728 units at the moment, nearly twice the number of existing Suezmaxes. If one adds the 242 orders already in the books for the next five years, owners must count on a market, which is continuously growing, and also on the development of new routes, in order to hope for freight rates to be maintained. At the end of 2006, nearly 60 million dwt of double-hull tankers were in service. On the basis of current orders and, even if some ships are fitted to carry refined products rather than crude in the long term, the world fleet of Aframaxes (double-hulled) will amount to over 80 million dwt at the end of 2009!

To conclude: The scrapping of single-hull vessels will have positive impact only on VLCC segment. The 102 VLCCs which have been ordered for delivery in 2009 and 2010, apart from the fact that they have been signed up at record price levels, indicate that their owners do not seem to have any doubt as to the implementation of these rules. On the demand side, the International Energy Agency (IEA) estimates global oil demand at 1.8% YoY in 2007 (1% YoY in 2006), mainly led by China and Southeast Asian countries (including India).

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