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Print articleThe future of suezmax
Erik Ranheim looks at the implications of tight oil supply for the tanker market
The sales of two suezmax tankers, Discovery and Unicorn (built in 2002 and 2003) in July this year for $190 million says a great deal about the incredible good times there have been in shipping recently. The Discovery was ordered for a price of $43 million, delivered in January 2003, and has since traded for 4.5 years. Considering the difference between the newbuilding/sales prices and earnings, these two tankers will have netted well over $200 million since 2003, more than half of it in the freight market.
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Assuming a 25-year lifetime, six per cent costs on total capital, operation costs of $7,000 per day (with a two per cent increase per year), dry docking costs of $1, 2, 3 and 4 million after 5, 10, 15, 20 years and a residual value of $6 million, the break-even rate of a $53 million tanker is some $20,600 per day. Making the same assumptions for a $95 million ship, the breakeven rate would be $34,400 per day. Such a rate would still give a healthy trading profit if the average freight rates we have had over the last 4-5 years continue.
Freight rates for a suezmax were, at the beginning of July, around breakeven level for a $95 million tanker and had been weakening. Is it likely that rates will climb back to previous high levels for a sustainable period?
Cautiously positive demand outlook
In the medium-term oil market report, the Paris-based International Energy Agency (IEA) forecasts global oil product demand to expand by 1.9 million barrels per day (mbd) or 2.2 per cent per year on average, reaching 95.8 mbd by 2012. Growth is driven by the stronger oil demand growth in non-OECD countries, particularly in Asia and the Middle East, where demand will grow more than three times faster than that of the OECD economies. OECD oil product demand is expected to rise from 49.6 mbd in 2007 to 52.1 mbd in 2012, driven by transportation fuel demand growth in North America, where consumption is poised to grow twice as fast as in Europe or the Pacific. In contrast, non-OECD oil product demand is poised to increase by, on average, 1.4 mbd or 3.6 per cent per year.
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Transportation fuels will account for the bulk of demand growth in both OECD and non-OECD countries. These fuels will represent about 60 per cent of the rise in non-OECD demand. China is the key to demand growth in Asia. In 2004, about 74 per cent of Asian demand growth came from China; in 2005/6, around two-thirds of the incremental growth came from China. IEA expects China’s oil product demand to grow at 5.6 per cent per year between 2007 and 2012. Some 55 per cent of the increase in world oil demand is projected to come from China, the US and the Middle East.
Strong economic growth has benefited shipping but high economic growth rates do not always translate into high oil demand growth. Oil product demand growth in India has been lacklustre despite record GDP growth rates of above eight per cent per year. Japan will be the main cause of the slowing down of the Asian oil product demand growth picture. Japan’s demand will fall by at least 0.7 mbd between 2007 and 2012.
Half the increase in oil supply is assumed to come from non-OPEC countries, with the biggest coming from Brazil (+1.05 mbd) and the former Soviet Union (+1.74 mbd of which Russia will supply 0.58 mbd). Biofuels are assumed to represent 0.66 mbd of the increased supply. Oil production in Europe is assumed to decline by 1.27 mbd, which will mean more imports. All in all, the outlook for tanker demand looks cautiously positive, but the increase in demand is concentrated in only a few areas and it is important to watch a few critical factors. Part of the increased demand in the US will probably be met by biofuels and increased supply from Canada. Part of the increased demand in China will probably be met by increased imports from Russia via a new pipeline that is projected to come on stream next year. This could mean that the entire increase in Chinese demand for one year may come via this pipeline.
 Assume max phase-out, balanced market end 2006 and increase in demand of 3.5%. It is assumed that there will be six more suezmaxes deleted in 2007 and eight each in 2008 and 2009 in addition to scheduled phase-out, which will has the same effect as premature phase-out. |
Oil supply will, according to the IEA, not be able to keep pace with demand. Nations outside the Organisation of the Petroleum Exporting Countries are expected to add about one per cent to supplies per year. That puts most of the burden of meeting the increase on OPEC, in particular Saudi Arabia, which would face capacity constraints itself. In the long term it may be oil supply that will restrain the increase in tanker demand.
The supply of suezmaxes
The suezmax fleet is on average only nine years old. There are only 60 suezmaxes of 4.3 million dwt to be phased out and the order book is in the area of 133 tankers of 21 million dwt. Making some simple assumptions: 3.5 per cent growth in demand (on the high side?), a balanced market end 2006 (there was some slack), and eight removals of suezmaxes each year for conversions before 2010, and all single-hull suezmaxes to be removed from the market by end 2010, we may obtain an idea about the tightness in the market. The graph shows a balanced market in 2007 and 2008.
If demand grows more than 3.5 per cent the market balance will be rather tight this year and in 2008, when a surplus will start to build up due to the deliveries of 56 suezmaxes of 8.8 million dwt in 2009. Under these assumptions, the surplus will last until 2013. There will be few scrapping candidates to improve the supply/ demand situation if demand should fail, except for a few double-bottom or sides tankers that could be scrapped or converted earlier.
Of course, the single tanker segments can not be seen in isolation, but a surplus is likely to build up in each segment, even if the situation appears to be most favourable for the suezmaxes.
Report by Erik Ranheim
www.intertanko.com
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