Speeding ships to put brakes on freight rates rally

Source : Bloomberg

(LONDON) The biggest rebound in oil-tanker rates in almost two years is already being threatened by signs the surge may spur ships to speed up, increasing vessel supply and undermining the rally.

The largest tankers cut their speed to an average of 10 knots in October, from 10.8 knots a year earlier, after eight months of unprofitable rates, data show. A one-knot change adjusts the fleet's capacity by 5.8 per cent, Oslo-based Arctic Securities ASA estimates.
Shares of Frontline Ltd, the biggest operator of the ships, jumped 19 per cent in the past two weeks as tanker earnings approached break even.
'A few extra knots will put a brake on this rally and any others that come within the next few years,' said Erik Nikolai Stavseth, an analyst at Arctic Securities who advised selling Frontline a year ago, since when the stock slumped 80 per cent. 'We are now moving into the earnings territory where owners have less incentive to keep speeds low.'
Daily rates that reached US$28,829 on Nov 18 last exceeded the US$29,800 that Frontline says it needs to break even in March, according to data from London-based Clarkson plc, the world's biggest shipbroker.

Owners are managing the biggest fleet in at least three decades, in a year in which global oil demand growth is forecast by the International Energy Agency (IEA) to slow to one per cent from 3.1 per cent. Shipping companies started cutting speeds to reduce fuel costs and trim capacity.
Forward freight agreements, traded by brokers and used to bet on future transport costs, indicate current rates won't last. Contracts for the benchmark Saudi Arabia-to- Japan route are trading at US$9,377.90 for 2012 and US$13,437.48 for 2013.

That's still better than this year's average of US$7,870.14, according to data from the London- based Baltic Exchange, which publishes rates along more than 50 maritime routes. Very large crude carriers (VLCCs) haul about 20 per cent of the world's oil.

Equity investors are anticipating narrowing losses for shipping companies next year. Frontline, based in Hamilton, Bermuda, will report a loss of US$84.8 million for 2012, compared with a loss of US$125.7 million for this year, the mean of 19 analyst estimates show. Shares of the company rallied 25 per cent since Oct 4 in Oslo trading, paring this year's decline to 80 per cent.
General Maritime Corp, which operates a fleet of 29 tankers, filed for bankruptcy court protection from creditors on Nov 17.

Owners ordered the most ships in about four decades in 2007 and 2008, when rates rose as high as US$229,000. The fleet expanded 11 per cent to 555 vessels since the end of 2008 and orders at ship yards are still equal to almost 15 per cent of existing capacity, according to data from Redhill, England- based IHS Fairplay.

Each carrier can hold about two million barrels of oil, more than France consumes daily.
Any increase in speed may be partly offset by strengthening demand. Oil consumption will average a record 90.5 million barrels a day next year, compared with 89.2 million this year, the Paris-based IEA said in a report on Nov 10.

China will use 5.3 per cent more, three times the growth predicted globally. The Asian nation is the top destination for crude shipments on VLCCs in terms of volume, according to Bloomberg ship-tracking data.

The rally in rates may also be sustained by older ships being scrapped. The cost of a 15-year-old tanker fell 48 per cent to US$23.5 million this year as scrap values rose 3 per cent to US$17.25 million, the narrowest gap in at least five years, according to data from Clarkson and Simpson, Spence & Young Ltd, the second-largest shipbroker. Owners may break up 5 per cent of the fleet within 18 months, the most in nine years, Clarkson Capital Markets LLC estimates.
Rising energy costs may encourage owners to keep tanker speeds low. Ship fuel, known as bunkers, jumped 32 per cent to US$671.37 a tonne this year, according to data from 25 ports.

An empty vessel burns about 90 tonnes of bunkers a day when travelling at 14 knots, according to Riverlake Shipping SA, a broker in Geneva. That can drop to 25 tonnes when sailing at 10 knots, Frontline said in March, implying a saving of about US$43,600 a day. -- Bloomberg