Over 90% of world trade is carried by the international shipping industry. There are around 50,000 merchant ships trading internationally, transporting every kind of cargo. The world fleet is registered in over 150 nations, and manned by over a million seafarers of virtually every nationality.
Classification of Tankers on the basis of Size
Tanker types
ULCC: They are known as Ultra Large Crude Carriers and have a cargo hauling capacitance range up to 5, 00,000 tons. Know more about them here.
VLCC: Known as Very large crude carriers these tankers have a cargo carrying capacitance of 2, 50,000 tons.
Panamax: The classification of tankers that can pass through the Panama canal is known as the Panamax. The cargo tankers which cannot be classified under this category owing to their size are known as the Post-Panamax tankers.
Aframax: are that type of tanker ships which are mainly used in the Mediterranean, China Sea and the Black Sea. These tankers have a dead weight tonnage (DWT) between 80,000 and 1, 20,000 tonnes.
Suezmax: Panamax tankers are named for vessels which can navigate through the Panama Canal. On similar lines, the Suezmax vessels are so called because of their ease in passing through the Suez canal
Freight rates
The market for ship hire is divided into the spot market and time charter. In the spot market shipping is arranged for a single voyage and the owner of the ship manages the voyage. A ship which has been chartered is hired for a period of time and although the ship is still operated by the ship owner, the charterer has control of the destinations and the operation of the ship. Time charters can be fixed in advance and act as a futures market where charterers can ‘lock-in’ ship availability at a future date. Ships can be chartered years in advance and this offers a more steady earnings stream versus revenue generated from the spot freight market. Freight rates are dependent on the supply/demand equation between global shipping demand and the supply of ships.
Tankers have an approximate 20-25 year life, with older ships in the industry regularly being scrapped. New tankers can take two to three years to be ready for operations leaving a significant lag time meaning that once a tanker is built the company may have little use for it. This was the case in the last recession, where tanker capacity ordered prior to 2009 has only come into service post the economic crisis.
Against the backdrop of tanker supply, which is relatively fixed in the short term is tanker demand, which has historically been subject to regular shocks. For the tanker shipping industry, unexpected demand growth, in terms of capacity demand, has included conflict in oil producing regions, natural disasters and economic growth of emerging markets. This inability for tanker supply to expand or contract rapidly to short term demand shifts leads to significant jumps in freight rates and volatility in shipbrokers earnings. Though revenue generated from time charters helps smooth to a degree the volatility of shipbrokers earnings compared to the underlying tanker chartering rates.
Prior to the economic crisis in 2008 ship owners, encouraged by high charter rates at the time, ordered a glut of tankers. However with the ordered tankers only entering the service post the beginnings of the financial crisis the industry is currently experiencing a huge mismatch in supply and demand. Presently too much shipping capacity is chasing too little demand. As such freight rates have at times dropped to below the operating costs of the shipping companies.Earnings for very large crude carriers, each able to hold 2 million barrels of oil, retreated to a low of $10,674 a day in 2012. This less than half of the $24,200 that Frontline Ltd., a leading tanker operator, says is required for its VLCCs to break even. In 2012 the average daily earnings for VLCCs was $26,813. This was the second lowest in a decade and 28 percent of the peak figure reached in 2008.
As such a number of the world’s largest crude shipping oil companies are experiencing severe financial difficulties. The oil tanker operators’ association Intertanko has estimated the world’s large and midsize tanker fleet has accumulated losses of more than US$26Bn since 2009 as rates have fallen below operating costs.
Tanker capacity oversupply has led to historically low tanker freight rates which are below the operating costs of many ship owners.
The global tanker fleet grew by 7.2 million deadweight tonnes (mdwt), or 1.4 percent, in 2014. The majority of the fleet growth during the year was in the product sectors, whereas the crude tanker fleet grew by just 0.7 percent. In January 2015, the International Monetary Fund (IMF) lowered its outlook for 2015 global economic growth to 3.5 percent, from 3.7 percent previously. This marks a modest improvement from global economic growth of 3.3 percent in 2014.
Historical precedence
An interesting historical analogy to today’s current market situation is the market dynamics the industry experienced in the 1970s. Based on expectations of high economic growth and ship demand in the early 1970s, there was a rapid growth in the tanker fleet to a peak of 330m dwt in 1978. However the market did not anticipate the two oil crises in the same decade that reduced demand for shipping volume. The lag between supply coming online and changes in demand created an oversupply of tankers on the market. It took until 1988 until the scrapping of enough existing ships countered the exuberance of ship owners in the previous decade. By this time the market had in fact over corrected as demand picked up due to robust economic growth during the mid 1980s. The recession in the early 90s and the Asian economic crisis later in the decade led to limited tanker fleet growth during this period. The strength of the US economy and the rise of China before the economic crisis lead to the capacity of the global tanker fleet reaching levels not seen since the peak in 1978.
To be continued...part two will focus on looking at potential stocks which will benefit from growth in the industry.