SCA: Tanker Rates Justify Higher Construction Prices

Tuesday, November 12, 2002
The vessel retirement schedule in the Oil Pollution Act of 1990 will force retirement over the next five years of at least 12 U.S.-flag product tankers totaling almost 500,000 dwt of capacity (approximately 25 percent of the total U.S.-flag product tanker fleet) and over 50 U.S.-flag tank barges greater than 5,000 gross tons totaling over 1,000,000 dwt of capacity (approximately 45 percent of the total U.S.-flag ocean-going tank barge fleet greater than 5,000 gross tons). The struggling economy in the wake of the September 11 attacks and historically warm Winter in 2002 caused reductions in the demand for product movement over the past year; however, with heating oil stocks in New England 27 percent below average for the last four years and the economy expected to recover, demand for petroleum product movement will increase causing charter rates to rise along with demand. According to the Shipbuilders Council of America (SCA), with long-term charter rates for U.S.-flag double-hull tankers now at a level of $37,000/day, rates justify construction costs of approximately $85 million per vessel. The breakeven time charter rate for a $85 million handysize tanker utilizing 25 year Title XI financing at 7 percent per annum and daily operating costs of $15,000 is approximately $34,700/day, a rate well below today’s market. Under similar circumstances, a charter rate of approximately $33,000/day is needed to breakeven using 6 percent per annum financing, a realistic percentage in today’s financing market. Using shorter term financing options available to many operators suggest that today’s long-term charter rates justify construction costs of upwards of $80 million per vessel. Vessel leasing financing enables financial institutions to offer lower interest rate terms to qualified operators thus improving operator’s cash flow. Financial institutions are able to offer lower term financing because they can offset lower interest rate terms by taking advantage of asset depreciation benefits as the owners of the vessels. Vessel leasing deals are available on the marketplace today at interest rates as low as 5.5 percent amortized over 15 years. Charter rates of approximately $36,000/day justify a price tag of close to $80 million using vessel leasing financing.

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