Low Rates, High Costs Put Squeeze On Tankers

Friday, August 20, 1999
Oil tankers are being squeezed by low freight rates and high fuel costs and some older ships may be heading for the scrapyard, according to a report by shipbrokers Simpson, Spence and Young (SS&Y). An OPEC cut in oil production combined with reduced demand and high bunker fuel prices makes it difficult for even older tankers with little financial commitment to break even, said SS&Y’s Monthly Shipping Review. Many newer tankers, burdened with paying interest on construction costs, will be operating at a loss. Rates this summer for Very Large Crude Carriers (VLCCs) heading to Japan from the key Middle East loading theater have been attracting rates as low as Worldscale 36 ($4 a ton) and have been paying bunker fuel prices of over $100 a ton. SS&Y reported that the last time bunker prices were at comparative high levels was in late 1997 when charter rates for Middle East to Japan trips were around W80, more than double current levels. “If this combination of high bunker prices and low freight rates continues for any length of time, tankers approaching their 25th anniversary may make a hasty exit to the scrap yard,” the report said. Earnings for tanker owners are not expected to improve dramatically in the short-term. OPEC’s output cuts are continuing to enjoy compliance of over 90 percent from member countries and while some owners may opt to scrap, the impact of their vessels leaving the market will not be felt in the near future. Tanker owners group Intertanko said in their August report that so far this year 67 tankers, 14 of them VLCCs, have been sold for scrap. But 120 new tankers, 18 of them VLCCs, have been built and are looking for business, that looks increasingly sparse and unprofitable.

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