Feature: Product tanker owners - longer term reasons to be cheerful

The product tanker market has been in poor shape for the best part of three years and prospects for an immediate return to healthy freight rates are not bright. Aside from the occasional, short-lived upturn, too many ships chasing too few cargoes has been

the status quo in most product tanker sectors since the credit crisis broke in September 2008. In general terms, returns have not been sufficient to meet operating expenses since early 2009.
In 2010 for example, the average day rate for a long-range 1 (LR1) product tanker carrying 55,000 tonnes of naphtha on the benchmark TC5 route from the Gulf to Japan was USD 9,000, down from USD 14,750 in 2009 and USD 30,000 in early 2008. Comparable time charter rates for such vessels declined by 10% between 2009 and 2010.
The relatively young LR1 fleet of tankers in the 60-80,000 DWT size range was augmented by 37 newbuilding deliveries in 2010. The number would have been greater were it not for the slippage in ship completions. A number of product tanker owners have negotiated with shipyards for delayed completion dates for, and sometimes the cancellation of, their newbuilding orders. Some 40-50% of product tankers on order suffered some degree of slippage in 2010.
Owners of medium-range (MR), or Handymax, product tankers, i.e. ships of 40-60,000 DWT, also had a tough time last year. The benchmark TC2 route covering movements of gasoline from Europe to the US, normally a dependable fallback option for MR vessels, remained quiet throughout. Only shipments of diesel from the US to Europe reached what could be considered breakeven levels. As a result, the average spot hire rate for MR tankers in the Atlantic Basin in 2010 remained stubbornly below the USD 10,000/day mark, about one-third of the level of mid-2008.
The world MR fleet, which stands at 1,150 vessels, is due to be augmented by 100 ships of this type currently on order. However, the MR newbuildings, on average, are larger than existing vessels of the same type, to the extent that the newbuilding fleet is equal to over 15% of existing fleet in tonnage terms. The percentage is similar for the LR1 fleet while the LR2 newbuilding fleet, i.e. those vessels of 80-120,000 DWT, is equivalent to 25% of the existing fleet in tonnage terms.
As is the case for LR1 and LR2 ships, because the number of new MR product tankers being added to the fleet continues to outweigh trade growth and ships being removed, freight rates in these segments are expected to remain under pressure for the remainder of 2011 and into 2012.
The other product tanker sector is the Handysize fleet, comprising vessels in the 30-40,000 DWT size range. Only 10 new product tankers of this type are due to be delivered to the 570-vessel Handysize fleet in 2011. The relatively small number of newbuildings in this segment and the fact that the fleet is ageing are a reflection of the extent to which the role of the Handysize product tanker is slowly being taken over by MR vessels in many regional markets.
In gearing up for a market recovery that will inevitably be slower than wished for, ship owners are adopting various defensive measures, as highlighted by the newbuilding slippage arrangements. Other steps that have been taken include slow steaming and the postponement of any further newbuilding orders.
In addition, some owners have taken advantage of the lower prices currently pertaining to purchase one or more of their competitors’ newbuildings prior to delivery if the price is deemed to be right. The acquisitions are regarded as good investments that will pay dividends when the product tanker market does bounce back.
A number of other signs of a more positive market have begun to make themselves apparent in recent months. The Atlantic Basin trades have been bolstered by a healthier demand in the US for gasoline from European refineries and for US exports of other refined products in Latin America. Both developments, as well the increased volatility in oil prices due to the recent unrest in North Africa, have boosted arbitrage opportunities for product tanker owners.
Over the course of Spring 2011, while the US replenished its gasoline stocks, owners of MR vessels on the TC2 route reported a trebling of spot hire rates. In addition, the demand for gasoline, and diesel, in Latin America is growing at a rate which cannot be matched by the pace at which the region’s refinery output is climbing.
The phase-out of older, single-hull Panamax tankers has also created one or two opportunities in the crude oil trades and the operators of some LR ships have directed their vessels to this segment of the oil market to help them through what is proving to be a difficult time for the movement of naphtha eastbound out of the Gulf to Asia.
Another upside for operators of product tankers has been the completion of several Worldscale refineries in the Middle East and India and the associated need to move larger parcels of refined products longer distances. These refineries are a key reason why so many product tankers were ordered in the years up to 2008 and delays in the construction of these facilities have done nothing to help the beleaguered tanker shipping market of recent years.
China, now the world’s largest consumer of energy, will remain a key swing market for operators of product tankers due to the sheer size of demand. The recent adoption of a more austere fiscal policy in China, as the government seeks to rein in liquidity and control accelerating inflation, is likely to reduce the pace at which the country’s petroleum product trade volumes have been increasing, at least temporarily.
As a result of an expected year-on-year decline in the rate of oil demand growth, down to 5.4% in 2011 from 9.5% last year, and expanding domestic refinery capacity, net Chinese imports of products including gasoline, diesel, kerosene and naphtha, could drop to 12.4 million tonnes (mt) this year, from 16 mt in 2010. Against this background, it must be remembered that China is a major exporter as well as importer of refined products.
From most perspectives 2010 was an exceptional year in China. The demand for diesel last year climbed 11%, to 164 mt, while gasoline consumption increased to 74.6 mt, driven by a 32% rise in car sales. However, the government has now withdrawn the tax breaks and rural subsidies that helped the nation overtake the US as the world’s biggest car market in 2010.
China may be in the midst of a temporary slowdown but the momentum created by the economic powerhouse continues to drive healthy levels of GDP growth and energy consumption. China’s role in the international products trades will only increase over time.
Taking a look at the global product tanker picture, the longer term prospects for the fleet are good and, as explained, the first rays of a recovery are already beginning to break through. Much of the new refinery capacity now coming on stream and due to be commissioned in the years ahead will be located away from the main consumption areas. This will lead to improved tonne-mile demand and better product tanker utilisation rates.
The strong demand for new crude oil and petroleum product storage terminals, to act as regional distribution hubs and to optimise supply chain economics by smoothing out geographical imbalances, underpins this current trend. Furthermore, the increasing focus by the energy majors on profitable upstream operations, at the expense of older, less-efficient refineries, will reinforce the demand for product tankers in the longer term.
Source: Bimco