Tanker Supply, Demand Profitability To 1996

"Tanker Supply, Demand and Profitability to 1996" analyzes recent chartering trends, from 1985 to 1991, and examines the operating profitability of various tankers during the period. Forecast spot and time-charter freight rates are presented, from 1992 to 1996, on both a break-even and projected basis. Due reference is made to the underlying environment for operating and voyage costs, and the relationship to chartering revenues. Changes in the structure of the tanker fleet between 1985 and 1991 are shown in detail. The evolution of tanker supply, and the theoretical surpluses for varying sizes of vessel, is made against a background of the current order book, and projected scrapping and delivery patterns.

The main conclusions of this report are: • Freight rates will be depressed during 1992-93 as replacement tonnage is delivered to offset the anticipated growth in the scrapping of mid-1970s-built tankers.

• The pressure on newbuilding prices should be relieved by the peak in vessel deliveries during 1992. • The modest growth in tanker demand, forecast for 1992-96, is heavily dependent on increased crude and products movements from the Middle East.

Between 1985 and 1991, chartering volumes in the spot and period markets rose strongly, against a background of growth in crude oil and refined products movements. The widespread improvement in freight rates brought about a corresponding improvement in cash flows for vessels of all sizes. However, the net contribution to capital (on the basis of fully built-up costs) has remained quite steady since 1988, as operating and capital costs have also risen strongly.

The market is now entering a period of growing uncertainty, encompassing an ever-aging VLCC fleet, and the increasing influence of the 1990 U.S. Oil Pollution Act. Thus, recent prosperity now looks set to be overtaken by a further difficult spell, caused by a substantial increase in replacement tanker tonnage.

The way in which vessels on the current order book are scheduled to be phased into the fleet implies an expansion in excess of 10 percent between 1992 and 1994. This in itself would be sufficient to ensure that freight rates are depressed during 1992-93, and only show real improvement by 1995-96 (provided some ordering restraint is seen and mid-1970s-built tonnage is widely scrapped).

Future growth in seaborne crude and products trades is largely dependent on export cargoes from the Middle East. Notwithstanding this, theoretical tanker demand (i.e., assuming no inefficiencies) is only forecast to grow by an average of 1 percent per annum between 1992 and 1996.

Some 40 percent of the total tanker fleet was built between 1974 and 1976, and if its theoretical trading life were assumed to be 20 years then, disregarding life extension, this portion of the fleet would be scrapped during 1994-96. Although this will not happen, the tanker order book has risen strongly, and in December 1991, stood at 51.5 million dwt, or 20 percent of the fleet, of which some 80 percent is currently scheduled for delivery by the end of 1993.

The theoretical tanker surplus, taking into account projected scrapping and delivery patterns, will rise to almost 30 percent in 1993, before declining sharply in 1995-96, to 23 percent, as scrapping rates are accelerated. On an annual basis, a typical vessel is expected to be able to maintain a break-even position in the spot market (i.e., cover operating and voyage costs), a situation which has prevailed since 1987. Furthermore, there is reason to believe that nominal freight rates will rise, reflecting the underlying pressure from rising operating and capital costs.

For further information, contact: Drewry Shipping Consultants Ltd., 11 Heron Quay, London E14 4JF.

tanker tankers vessel shipping fleet market order supply products environment position charter rates revenues pollution crude tonnage