Tanker Market in the Doldrums

By Greg Trauthwein
Thursday, June 23, 2011

The global tanker market is depressed, it appears that there is little hope that it will recover for at least two years, according to a panel of expert speaking yesterday at a MarineMoney event in New York City.
“What a difference a year makes,” said Jonathan B. Chappell, Managing Director- Research, Evercore Partners, Inc., and the moderator of the panel dubbed “Oil Tankers: Challenges and Opportunities Beyond Supply & Demand.”
“Last year everyone was slapping each other on the back, but I don’t think there is any doubt where we are today; we are in a trough,” Chappell said.
The global shipping markets are historically cyclical and difficult to predict, even for seasoned veterans, and there was no consensus on when a full recovery would come about, though generally it seems 12 to 36 months is a popular line of thought.
“The easy answer is: ‘rates are down and there are too many ships,’” said Jan Andersen, Head of Shipping, ST Shipping and Transport Pte. Ltd.
Theories abound as to why the tanker market remains in the doldrums despite strong demand, particularly in developing markets. When the world economy took a dive in 2008, a large number of VLCCs were used to simply store oil, waiting for more favorable rates to return. The market has now fully absorbed most of this tonnage back into the pipeline.
“Floating storage took VLCCs out of the market and sent false signals to the market,” said Michael Reardon, Manager Global Strategy and Freight Traiding, ConocoPhillips. “We are at or near the bottom; things can get worse, but not much worse.”
Another factor keeping rates low is the relatively young age of the fleet, with many new ships still in the pipeline for delivery, and the dearth of scrapping activity.
While most of the panelists agreed that the demand for quality tonnage will mean the traditional 25-year lifecycle of a tanker is a thing of past, accelerating the scrapping of younger tonnage, they concur that scrapping alone will not bring rates back, rather they called for discipline among shipowners to not order new ships anytime soon. “There will have to be discipline going forward, as everyone has to watch their cash flow,” said Andersen.
Jeffry D. Pribor, Executive VP & CFO, General Maritime, put it succinctly: “Please, let’s not add any more vessels.”

Opportunities?
While the outlook is grim, the coming months present tanker owner/operators the opportunity to get their collective financial house in order, and the stronger companies will have the opportunity to pick up some ships, perhaps even an entire company, at vastly reduced rates.
“In the next 12 to 18 months you must make your business as efficient as possible,” said Andersen. He said a number of costs are rising, from general maintenance to insurance costs to bunker costs, while rates remain flat. “Eventually this downturn will present opportunities, whether it is buying ships or companies cheap.”

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