High rates have lured a significant number of tanker owners into forking out the relatively small costs associated with converting their ships from Category 1 to Category 2 vessels. Category 1 vessels are those of 20,000 dwt and above carrying crude, fuel, heavy or lubricating oils as cargo, and “pre Marpol” tankers of 30,000 dwt and more carrying other oils. Pre Marpol means ships that do not have protectively located segregated ballast tanks. Category 2 vessels, on the other hand, do have protectively located segregated ballast tanks.
The net result, according to Norway’s Platou, is that some 30m dwt of vessels due to leave the fleet during 2005 will not now do so. A recent study carried out by the broker’s research department, showed about 5m dwt out of the 30m dwt of Category 1 ships are now set to be scrapped next year, with the balance continuing to trade for up to three more years.
If these numbers prove correct, the tanker fleet is set to grow much faster than anybody previously thought and the key to the market’s future is whether these higher volumes of tonnage can be absorbed by the market. This year, it will expand by a net 3.5%, according to Platou, whereas it will grow by a whopping 6-7% in both 2005 and 2006 if this CAT analysis proves correct. A further 4-5% of fleet capacity will be added in 2007. “We doubt that this sharply higher fleet growth could be met by a similar strong growth in tonnage demand”, says Platou. “We thus expect the tanker market to weaken moderately through 2005/6”.
Meanwhile, charterers shouldn’t worry too much about rocketing tanker charter rates because
short-term demand for oil products is relatively inelastic and an increase in transport costs will simply be passed on to consumers, says Platou in its most recent monthly report. The broker comments that a doubling in VLCC rates from $100,000 to $200,000 a day corresponds to two cents on a litre of petrol or eight cents on a US gallon. “All available tankers are fully utilised”, says Platou, “and the surge in freight rates seems not to meet any resistance”.
However, these extremely strong rates – the prevailing spot rate for a 270,000 dwt vessel earlier this week was just over $240,000 a day – could be threatened if the supply of tonnage outpaces demand. On balance, Platou believes the market should stay strong provided the oil market is able to absorb the greater volumes of oil that Opec is pumping without prices falling significantly. Opec output
in both September and October was more than 30m b/d, according to industry sources.
Between 2000 and 2002, world oil consumption grew by a relatively steady 1% a year. However, the growth rate expanded to 2.2% in 2003 and, fuelled largely by Chinese consumption, is likely to reach 3.5% this year. During the first half of 2004, Chinese oil consumption grew by a staggering 22% as the country’s creaking rail network failed to keep pace with rocketing coal imports.
According to Platou, oil analysts are expecting the growth in oil consumption to weaken somewhat during 2005, perhaps to around 2%, as a result of slower economic growth, higher end user prices and serious constraints on oil production and refining capacity. However, the Norwegian broker points out that oil analysts have proven too bearish on occasions in the past, and could yet be proved wrong this time round.
Meanwhile newbuilding prices are shooting up again at ever faster rates. VLCCs, for example, which were typically available at the end of last year for $77-78m, Platou says, were costing around $100m in September and increased a further 5% to $105m by October. Capesize bulk carrier prices are rising even faster. Between the end of last year and September they rose by just over 23% but they shot up by another 10% between September and October.