leading the way; making a difference singapore council meeting may 10, 2012 tanker market review...

Leading the way; making a difference

Singapore Council meeting May 10, 2012

Tanker market review

Erik RanheimSenior Manager Research & Projects


It’s unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money — that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot — it can’t be done. If you deal with the lowest bidder, it is well to

The Common Law of Business Balance

John Ruskin (1819-1900)

add something for the risk you run, and if you do that you will have enough to pay for something better.

prominent social thinker and philanthropist


Sustainability

Eco

no

mics

En

viron

men

t

So

ciety/Eq

uity

Transparency

Accountability

Responsibility


An occurrence such as price ceilings, price floors, or tax subsidies that involves an intervention in a specific market by a governing body. A market distortion can have the ultimate effect of creating a market failure, where resources cannot be efficiently allocated due to the breakdown of price mechanism caused by factors such as establishment of monopolies.

However, it can also enhance the welfare of society and the availability of resources and presence of conditions required for reasonably comfortable, healthy, and secure living and it includes government support for the poor and otherwise disadvantaged members of the society, usually through provision of free and/or subsidized goods and services

Market distortion


Failure in the tanker marker

• The tanker market is to a great extent part of the oil market the oil companies among the world biggest, and

• The oil companies do to a great extent set the standard• Commercially• Technically

• Demand development relatively steady• Strong fluctuation in freight rates and values• Fragmented ownership• Spot market dominance• Zeor tolerance for

Tanker Demand


Contracting by Country/Region (all types of ships)

m cgt contracting

1996 – 2004, 519 contracts 13.6 m cgt

$ m price

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Pro120

20

40

60

80

100

0

15

30

45

60

75

Japan South Korea

P.R.China Europe

Others Average

Aframax NB price

2005 – 2008, 234 contracts

2008 – 2012283 contracts


% growth

World GDP. Oil demand and seaborne trade growth

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

-10

-5

0

5

10

15

GDP

Oil demand

Tonne miles


mbd

World GDP. Oil demand and seaborne trade growth

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

9

12

15

18

21

24

4,000

5,800

7,600

9,400

11,200

13,000

Middle East Oil Prod mbd

Tonne miles

Asia 50% dependent on Middle Europe 18% US 7%

bn tonne-miles

Source: Fearnleys/Platou


mbd

Middle East oil production

OPEC production Mar 2012 31.43 mbdOPEC production sustainable production capacity: 34.91 mbdOPEC spare production capacity Feb. 2012 3.48 mbdOf which Saudi Arabia spare production capacity 1.88 mbd, Nigeria 2nd biggest 0.50 mbd

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1116

17

18

19

20

21

22

23

24

Jan-10M

ar-10M

ay-10Jul-10Sep-10Nov-10Jan-11M

ar-11M

ay-11Jul-11Sep-11Nov-11Jan-12M

ar-12

21,000

22,000

23,000

24,000

Source: IEA


mbd

World increase in oil demand China, Middle East, USA, ROW*and increase in world bio-fuel production

Source: INTERTANKO/IEA

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

-2.6

-2.2

-1.8

-1.4

-1.0

-0.6

-0.2

0.2

0.6

1.0

1.4

1.8

2.2

2.6

3.0

Rest of world* USA Middle East

China World Biofuels demand

Other Asia: 0.24

L America: 0.17

Africa: 0.16

FSU 0.13

Mexico/Canada -0.22

Europe -0.33

Middle East 0.21

USA -0.01

China 0.36

Others: 0.06

Total 0.77

Main Changes:

Area mbd


mbd

World oil demand 2012 (and production self sufficieny %)

27.3% 16.5% 31,8% 8.5% 7.3% 4.8% 3.8%

OECD

China

Other

N America Europe Asia/Pacific Middle East Latin America FSU Africa0

5

10

15

20

25

30

Mexico

Canada

62%

USA

25%

29%

Production


mbd

Oil import to selected areas

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

0

2

4

6

8

10

12

14

USA down 1.0 mbd since 2007 (peak)

Europe* down 1.2 mbd since 2003

OECD Asia** down 0.7 mbd since 2000

China up 2.7 mbd since 2000

* includes intra European import** Japan/Korea


mbd

US net crude oil import and production Jan 83 - Feb 12

Jan-

83

Jan-

84

Jan-

85

Jan-

86

Jan-

87

Jan-

88

Jan-

89

Jan-

90

Jan-

91

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

120

2

4

6

8

10

Production

Net crude import

EIA expects U.S. total crude oil production to average 6.2 mbd in 2012, an increase of 0.5 mbd from last year, and the highest level of production since 1998 .

N American oil production +1.1 mbd 2010 - 2012 – demand declined 0.5 mbd


US product import and export

mbd

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Export Import

Trade: 2000 3.0 mbd – 2006 4.5 mbd – 2012 4.9 mbd


mbd

Oil price and freight rate

27.3% 16.5% 31,8% 8.5% 7.3% 4.8% 3.8%

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

0

20

40

60

80

100

120

Nominal price Arab Light Real price Arab Light

Nominal freight rate AG-West Real freight rate AG-West

Deflated by the Consumer Price Index (USD)CPI* index 1982-84=100


Oil market hightlights

• Arab light oil price 1990-2004 $20.0 per barrel• 2005-2012 $73.0 per barrel

now $110.0 per barrel• Energy efficiency measures accelerated• Oil is in the process of losing its almost total

domination as a transportation fuel • The US oil import the lowest since 1998• China’s growth rate curbed

• Still – positive growth and• Increased dependency on the Middle East

Tanker Supply


Projected Tanker Fleet Development 1992-2013

m dwt number19

92

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

275

329

383

437

491

545

3,300

3,920

4,540

5,160

5,780

6,400

dwt Number


Tanker deliveries and removals

m dwt

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015-25

-5

15

35 SH phase out

Scrapping/ conversion

Delveries

Balance deliv-eries - deletions

year

Assumed removal of double hull tankers


Tanker phase out, deliveries, scrapping tankers 10,000 dwt+ balance(surplus) assuming various demand increases

m dwt

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015-25

0

25

50

75

Last phase out

Deletions

Delveries

Surplus zero trade growth

Surplus 2.5% trade growth

Surplus 4% trade growth

Surplus 6% trade growth

year

Assumed market balance end 2008

-1.8 % growth in 2009 3.8% growth in 20100.5% growth in 2011

Assumed removal DH tankers


VLCC - 15 years old and scrap value

m $

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

4m

12

0

10

20

30

40

50

60

Source: Clarkson/SIW


Tanker contracting by segment in bn USD and m dwt

$ bn

Source: Clarkson/SIW

m dwt

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

1Q12

0

11

22

33

44

55

0

17

34

51

68

85

Handy Aframaxes

Suezmaxes VLCCs

m dwt

m dwt


Contracting by Country/Region (all types of ships)

m cgt contracting $ m Afra price

Average 18 m cgt Average 58 m cgt Average 30 m cgt

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Est120

20

40

60

80

100

0

15

30

45

60

75

Japan South Korea P.R.China

Europe Others Aframax NB price

Contracting by Country/Region (all types of ships)cgt $ m price


Deliveries by Country/Region (all types of ships)

m cgt contracting

Average 18.3 m cgt Average 38.8 m cgt 13.6 m cgt

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20140

10

20

30

40

50 Others max 2.6 2013

Europe max 6.2 2008

China max 19.7 2011

S Korea max 16.1 2011

Japan max 9.9 2006


Average age tanker fleet

Years

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

6

8

10

12

14

16


Tanker trends - fleet, VLCC price, oil demand, and tonne-miles indices

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

65

70

75

80

85

90

95

100

105

110

115

120

125

130

135

140

145

150

155

160

165

170

175

Oil demand index

Tonne miles crude tanker index

Tanker fleet index

VLCC price index

Economics changed


Historical VLCC hire and bunker costs

1992 2002 20120%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Bunker

TC hire (+port costs)


Bunker price Fujairah and basis bunker price WS 380 Cst

$/t

02/07/199902/10/199902/01/200002/04/200002/07/200002/10/200002/01/200102/04/200102/07/200102/10/200102/01/200202/04/200202/07/200202/10/200202/01/200302/04/200302/07/200302/10/200302/01/200402/04/200402/07/200402/10/200402/01/200502/04/200502/07/200502/10/200502/01/200602/04/200602/07/200602/10/200602/01/200702/04/200702/07/200702/10/200702/01/200802/04/200802/07/200802/10/200802/01/200902/04/200902/07/200902/10/200902/01/201002/04/201002/07/201002/10/201002/01/201102/04/201102/07/201102/10/201102/01/201202/04/201202/07/201202/10/2012

0

100

200

300

400

500

600

700

800

380 cst Fujairah

Annual average Fujairah

WS basis


High fuel oil price change economics in shipping

The combination of low freight rates and high fuel prices since 1973 has made it abundantly clear that one can no longer assume constant vessel speed when analysing shipping markets.

Professor Victor Normann/Research Associate Tor Wergeland - Norwegian School of Economics 1977.


High fuel oil price change economics in shipping

• Real fuel prices virtually all time high• Fuel costs increased from 20% of freight to

70% of freight in 20 years• Reduced speed periodically equilibrate the VLCC market• Optimum speed for each ship depend only on

the ratio of the freight rate to the price of fuel• Consumption profile can vary strongly from ship to ship

• High pressure on the industry to reduce CO2 emission• • High oil prices has a negative effect on demand

Conclusion


Strategic consideration • World economy, “The risks remain high -

the situation fragile” IMF boss Ms. Lagarde

• High oil prices despite weakening demand• High bunker prices change economics in shipping• Age >15 years becoming an issue• Shipbuilding over-capacity• Oil demand North America retracting/Asia expanding• Some risks and opportunities cannot easily neither be

quantified nor identified - markets are never completely rational nor efficient – success requires the use of sound reasoning and trusting your gut feeling

• The only predictable thing about futures tanker market is its unpredictability


Assumptions for optimal speed

• Bunker consumption (BC) :

൬TCbasis 𝑥 𝑠𝑝𝑒𝑒𝑑𝑠𝑝𝑒𝑒𝑑 𝑏𝑎𝑠𝑖𝑠+ BCbasis 𝑥 BPrice x 𝑠𝑝𝑒𝑒𝑑𝑠𝑝𝑒𝑒𝑑 𝑏𝑎𝑠𝑖𝑠൰𝑥 𝑑𝑎𝑦𝑠

Net freight:

൬BCbasis 𝑥 ( 𝑠𝑝𝑒𝑒𝑑𝑠𝑝𝑒𝑒𝑑 𝑏𝑎𝑠𝑖𝑠) 3̂ ൰

(formula developed by MAN)

Ships should monitor to decide actual consumption


5.0

5.6

6.2

6.8

7.4

8.0

8.6

9.2

9.8

10

.4

11

.0

11

.6

12

.2

12

.8

13

.4

14

.0

14

.6

15

.2

15

.8

16

.4

0

2

4

6

8

10

12

14

165

.05

.25

.45

.65

.86

.06

.26

.46

.66

.87

.07

.27

.47

.67

.88

.08

.28

.48

.68

.89

.09

.29

.49

.69

.81

0.0

10

.21

0.4

10

.61

0.8

11

.01

1.2

11

.41

1.6

11

.81

2.0

12 knot

12

.41

2.6

12

.81

3.0

13

.21

3.4

13

.61

3.8

14

.01

4.2

14

.41

4.6

14

.81

5.0

15

.21

5.4

15

.61

5.8

16

.01

6.2

16

.4

Financing cost Bunker cost TC cost Port cost Optimal speed

Vessel speed (knot)

Ch

art

ere

r’s

co

st

(US

D/t

on

ne

)

Charterers’ costs

Interest rate 5% Bunker $700 per tonne, oil price 117 per barrel, TC $20,000

leading the way; making a difference singapore council meeting may 10, 2012 tanker market review...

Documents

production slide

difference mbd oil price

dwt slide

difference mbd oil import

area mbd slide

cgt slide

tanker demand slide

clarksonsiw slide