NEWS

Tanker Market Review – February 2011

 

Political risk in the Mediterranean and strong demand in Asia boosts February tanker rates

 

Tanker freight rates showed signs of life in February, as East Asia’s return from Chinese New Year’s celebrations in mid-February coincided with North African turmoil and combined to give a boost to the market. Perhaps more important was the relatively tight tonnage situation for February loadings. Not all sectors and routes are created equal, however, as Aframaxes operating in the Mediterranean have registered the largest gains.

 

After experiencing a fairly depressed January, VLCCs rates shot up dramatically in mid February, coinciding with the end of New Year’s celebrations in East Asia and tighter tonnage availability in the Arab Gulf region. VLCC spot earnings on our benchmark AG/East voyage more than doubled, from $19,000 per day in early January to $38,000 per day in February. By the end of February, however, momentum declined and earnings fell to $27,000 per day.

Suezmaxes appear to be steadily climbing out from their January ditch, as earnings on our benchmark West Africa/U.S. voyage rose to $15,000 per day in February from $9,000 per day in the previous month. As Libyan riots flared up in February, with other countries in the region also experiencing upheaval, vessels operating in the Mediterranean have demanded a hefty risk premium beginning in the last half of February. Aframaxes are the clear winner of this play (though insurance premiums may have climbed as well), as average Aframax rates climbed 46% in February, with earnings on the Med-Med routes nearly tripling. Unfortunately for shipowners, this did not translate into higher earnings on our benchmark Carib/U.S. Aframax route, as earnings fell to $6,000 per day in February from $15,000 per day in January. However, momentum shifted in the last week of February, and rates on this route exceeded their January averages.

 

Meanwhile, average product tanker rates rose slightly last month, from $11,000 per day in January to just under $13,000 in February. Earnings on our benchmark Carib/U.S. clean route, however, tumbled from $12,000 per day in January to $10,000 per day in February.

 

Instability in North Africa begins to affect broader tanker market

 

Unlike the riots in Egypt that began in late January, the unrest in Libya has begun to have a concrete impact on tanker rates, albeit mainly on a localized basis. Specifically, both Suezmaxes and Aframaxes operating in the region have begun to garner a heftier "political risk" premium. Indeed, Aframaxes loading Libyan crude are earning close to $70,000 per day as of early March. The knock-on affects have already begun to take shape, as both Aframaxes and Suezaxes on other routes appear to be experiencing an uptick. However, these higher rates are not necessarily supported by the fundamentals as we will show. Because of this and a greater risk of civil war and continued reductions in oil output likely, we have created several scenarios (see Spotlight on page 4) that show a range of possible tanker market outcomes if a prolonged supply shortfall occurs in Libya.

 

The curious case of OPEC production

 

OPEC production (a proxy for trade demand) appears to have registered strong growth in January, despite a dip in world oil demand that month. The word "appears" should be noted, as reports vary widely on OPEC production in December and January. According to OPEC’s own numbers, production grew by about 0.4 mbd compared to its December levels, totaling 29.7 mbd in January. Although roughly in line with OPEC’s January figures, other sources note a large jump in production taking place in December, making January’s output high, but relatively flat. With a substantial increase in OPEC sailings in December, the latter reports seem to coincide with the performance of the tanker market, as rates were substantially higher in December before falling back in January.

 

Much of OPEC’s increased sailings were bound for the U.S., where January crude imports increased 7% compared to the previous month. This large increase, however, did not appear to be consumption-driven, as consumption fell and U.S. stocks rose in January. Elsewhere, China’s crude imports also registered significant growth in January before the New Year’s celebrations, as the country imported 5.2 mbd, up 27% compared to the same month of the previous year, and up 4% compared to the previous month.

 

Floating storage steady in January

 

In the latter half of 2010, tanker rates were held in check by a decline in floating storage. Since October of 2010, however, much of the downward momentum lost steam. Moving into 2011, we have seen very little movement in the absolute levels of floating storage. We estimate that that short-term floating storage stood at 8.3 million dwt in January, representing a 1% decline compared to December. With unrest in Libya growing, however, there are signs that crude held in floating storage may decline slightly, as some reports suggest 2-3 Iranian VLCCs that were used for floating storage are now enroute to the Mediterranean for unloading. With these vessels out of storage, we estimate Iran has 10-11 VLCCs currently being used for storage. On the flipside, the recent steep contango on diesel in Western Europe may help to keep a lid on tonnage entering the open market.

 

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Dry Bulk Market Review – February 2011

 

Cape rates stuck below opex in first two months of 2011

 

After falling steadily over the course of January, the dry bulk market bounced back somewhat during February, only to see the rally fizzle in the final week of the month. More specifically, the Baltic Dry Index fell from 1700 at the start of January to 1040 in the first week of February, its lowest level in two years. By mid-February, the BDI climbed back to 1300, before falling back modestly in the last week of February.

 

The January decline was concentrated in the Cape sector, with spot rates plummeting from $18,000 per day to $5,000 per day. But February wasn’t much better for Capes, with rates briefly rising to $7,000 per day before falling back to $5,000 per day once again, leaving them well below operating cost levels.

 

Meanwhile, the other segments of the market have been less volatile, with rates falling modestly in January, but recouping most of these losses during February. Panamax and Supramax earnings both fell back from $15,000 per day in early January to $11,000 per day by the beginning of February, before rebounding during the second half of February, with Panamax rates moving back up to $15,000 per day and Supramax rates approaching $14,000 per day. Handysize earnings also moved down during January, falling from $12,000 per day to $10,000 per day, before edging up to $10,500 per day by the end of February.

 

With dry bulk freight rates generally weakening during the first two months of 2011, it is not too surprising that asset values have followed suit. So far this year, sales activity has slowed slightly relative to the 2010 pace, and prices have been marked down by about 10% since the end of 2010.

 

Looking ahead, we expect Cape rates to rebound temporarily over the next few months, but rates for all ship types are likely to weaken again in the second half of 2011. And dry bulk asset values are projected to move steadily lower over the coming year, falling by another 20-25% relative to their recent levels.

 

Australian floods lead to sharp drop in coal trade

 

The main story in early 2011 was an unexpected drop in dry bulk trade due to weather events. Most importantly, flooding in Queensland, Australia, led to a significant decline in coal exports. In January, exports from four main terminals in Queensland fell by 48%, or 8 million tonnes, relative to the year-earlier level, and preliminary estimates show coal exports in February remaining low, still down 40% from the year-earlier level.

 

With Australian supplies curtailed, Asian importers turned to other countries for coal. Exports from Indonesia picked up some of the slack, which didn’t do much for tonne-mile demand, but longer-haul exports from the U.S. also increased. Nevertheless, the overall impact of this disruption has clearly been negative for shipowners, despite the fact that Australian port delays have risen sharply since the end of 2010.

 

Meanwhile, a combination of wet weather and logistical issues also negatively impacted Brazilian iron ore shipments in January, with exports down 20% from December.

 

Although trade obviously took a hit because of the drop in iron ore and coal shipments, it is worth noting that the underlying demand for these commodities remains strong, driven to a large extent by a recovering global economy and increasing steel production. Global steel output increased by 5% in January compared to a year ago, boosted by moderate gains in Europe, Japan, Korea, Taiwan, and the Americas. As a result, preliminary estimates show met coal inventories being drawn down in early 2011.

 

While Chinese steel production was only up a minuscule 0.5% in January, Chinese iron ore imports soared to a record-high 69 million tonnes during the month, topping the previous record of 65 million tonnes that was seen in September of 2009.

 

But despite this surge of imports, Cape freight rates were extremely weak in January. One reason for this seeming incongruity is that most of these supplies would have been booked back in November and December, before Cape rates crashed.

 

Scrapping picks up, but fleet continues to expand rapidly

 

Besides the sudden drop in trade, another key factor behind the market’s early 2011 weakness is unprecedented fleet growth. After expanding by 16% in 2010, the dry bulk fleet has not paused for
breath in the first two months of the new year, with deliveries running slightly above last year’s
record-setting pace. Even though scrapping has picked up as well, the fleet is still growing at a 13% annual pace, with the Cape fleet continuing to expand at a 20% annual pace.

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New Marsoft Spotlight on Chinese Shipyard Developments

Marsoft recently added a spotlight feature to our monthly eBrief in order to discuss and analyze those trends and events that have a potential to impact the shipping markets, but do not neatly fit into our traditional format.  For our first Spotlight, Marsoft looked at the potential medium- to long-term impact of a substantial removal of shipyard capacity on newbuilding prices, a topic that was stimulated by our recent visit to China. This Spotlight can be downloaded here.

 

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