• APRIL 16, 2007

Tanker freight rates: Where are they heading?

Tanker freight rates across segments (VLCC, Suexmax, and Aframax) continue to remain highly volatile. As can be seen from the table below, freight rates for VLCCs (very large crude carriers), averaged US$ 40,222/day in FY07, with the highest average rates of US$ 59,136/day recorded in August 2006 and the lowest average freight rates of US$ 22,189 recorded in April 2006. Similarly, freight rates for Suezmax averaged US$ 37,170/day in FY07, with an average high and low of US$ 52,949/day and US$ 25,606/day respectively.

Tanker freight rates in FY07
Monthly average
rates (US$/day)
VLCC Suezmax Aframax
Apr-06 (Av.) 22,189 25,606 10,626
May-06 (Av.) 31,854 34,680 17,097
Jun-06 (Av.) 49,706 39,870 19,182
Jul-06 (Av.) 55,942 41,755 26,352
Aug-06 (Av.) 59,136 52,949 28,606
Sept-06 (Av.) 55,571 40,753 26,578
Oct-06 (Av.) 39,603 42,738 28,852
Nov-06 (Av.) 32,893 31,391 19,704
Dec-06 (Av.) 27,991 34,198 30,328
Jan-07 (Av.) 32,948 36,241 31,946
Feb-07 (Av.) 28,366 31,156 24,685
Mar-07 (Av.) 46,467 34,706 24,417
Yearly average 40,222 37,170 24,031

The weakness in tanker rates, in the earlier part of 1QFY07 was due to a heavier than usual refinery maintenance schedule in the US and Asia. However, the rates strengthened toward 2QFY07 on account of rising crude import volumes into the US coupled with Chinese imports (longer-haul movements). The tanker rates again weakened in 3QFY07 as a result of cutback in OPEC (Organisation for Petroleum Exporting Countries) output/exports and prolonged autumn refinery maintenance in key consuming areas.

Factors to watch out for

Capacity additions: The world tanker fleet stood at 369.1 mdwt (million dead weight tones) at the end of 2006, a 1.5% YoY increase. The order book during the same period stood at 110 mdwt, almost 30% of the total world tanker fleet. The addition of such a huge capacity to the world fleet is likely to put significant pressure on tanker freight rates.

Production cut by OPEC: Further production cut by OPEC to maintain oil prices at desired levels is likely to put negative pressure on the tankers rates as the shipping companies will be left with excess capacity.

Scrapping of older fleet: As per stipulations laid down by the International Maritime Organisation (IMO), all single hull ships are to be scrapped by 2010. The pace of deletion is likely to offset the negative pressure on freight rates caused by tonnage additions. Considering the demand for single hull tonnage for offshore project conversion, companies with older single hull fleet are likely to go in for conversions considering the stable and higher day rates for offshore vessels.

Consumption of oil: According to International Energy Agency (IEA), the oil demand in 2007 is expected to grow by 1.8% YoY, compared to a 1.0% YoY growth witnessed in 2006. This is likely to result in robust demand for tankers.

What to expect of shipping companies?

Going forward, we expect tanker freight rates to remain highly volatile. Hence, it would be prudent for investors to lookout for shipping companies that maintain sufficient revenue coverage through time charters, which is likely to insulate earnings from the volatility in freight rates. Moreover, companies with exposure to diverse segments like tankers, bulk carriers, LPG carriers and offshore services will provide better returns than companies in a single segment.

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