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Singapore Council meeting May 10, 2012

Singapore Council meeting May 10, 2012. Tanker market review Erik Ranheim Senior Manager Research & Projects. The Common Law of Business Balance.

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Singapore Council meeting May 10, 2012

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  1. Singapore Council meeting May 10, 2012 • Tanker market review • Erik Ranheim • Senior Manager Research & Projects

  2. The Common Law of Business Balance It’s unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money — that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot — it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better. prominent social thinker and philanthropist John Ruskin (1819-1900)

  3. Sustainability Economics Society/Equity Environment Transparency • Responsibility • Accountability

  4. Market distortion An occurrence such as price ceilings, price floors, or tax subsidies that involves an intervention in a specific market by a governing body. A market distortion can have the ultimate effect of creating a market failure, where resources cannot be efficiently allocated due to the breakdown of price mechanism caused by factors such as establishment of monopolies. However, it can also enhance the welfare of society and the availability of resources and presence of conditions required for reasonably comfortable, healthy, and secure living and it includes government support for the poor and otherwise disadvantaged members of the society, usually through provision of free and/or subsidized goods and services

  5. Failure in the tanker marker • The tanker market is to a great extent part of the oil market the oil companies among the world biggest, and • The oil companies do to a great extent set the standard • Commercially • Technically • Demand development relatively steady • Strong fluctuation in freight rates and values • Fragmented ownership • Spot market dominance • Zeor tolerance for

  6. Tanker Demand

  7. Contracting by Country/Region (all types of ships) m cgt contracting $ m price 2005 – 2008, 234 contracts 2008 – 2012283 contracts 1996 – 2004, 519 contracts 13.6 m cgt

  8. World GDP. Oil demand and seaborne trade growth % growth

  9. World GDP. Oil demand and seaborne trade growth mbd bntonne-miles Source: Fearnleys/Platou

  10. Middle East oil production mbd Source: IEA OPEC production Mar 2012 31.43 mbd OPEC production sustainable production capacity: 34.91 mbd OPEC spare production capacity Feb. 2012 3.48 mbd Of which Saudi Arabia spare production capacity 1.88 mbd, Nigeria 2nd biggest 0.50 mbd

  11. World increase in oil demand China, Middle East, USA, ROW* and increase in world bio-fuel production mbd Main Changes:Area mbd Source: INTERTANKO/IEA

  12. World oil demand 2012 (and production self sufficieny %) mbd Production OECD China Other 27.3% 16.5% 31,8% 8.5% 7.3% 4.8% 3.8%

  13. Oil import to selected areas mbd

  14. US net crude oil import and production Jan 83 - Feb 12 mbd N American oil production +1.1 mbd 2010 - 2012 – demand declined 0.5 mbd

  15. US product import and export mbd Trade: 2000 3.0 mbd – 2006 4.5 mbd – 2012 4.9 mbd

  16. Oil price and freight rate mbd 27.3% 16.5% 31,8% 8.5% 7.3% 4.8% 3.8%

  17. Oil market hightlights • Arab light oil price 1990-2004 $20.0 per barrel • 2005-2012 $73.0 per barrel now $110.0 per barrel • Energy efficiency measures accelerated • Oil is in the process of losing its almost total domination as a transportation fuel • The US oil import the lowest since 1998 • China’s growth rate curbed • Still – positive growth and • Increased dependency on the Middle East

  18. Tanker Supply

  19. Projected Tanker Fleet Development 1992-2013 number m dwt

  20. Tanker deliveries and removals m dwt

  21. Tanker phase out, deliveries, scrapping tankers 10,000 dwt+ balance(surplus) assuming various demand increases m dwt

  22. VLCC - 15 years old and scrap value m $ Source: Clarkson/SIW

  23. Tanker contracting by segment in bn USD and m dwt $ bn m dwt Source: Clarkson/SIW

  24. Contracting by Country/Region (all types of ships) m cgt contracting $ m Afra price Average 18 m cgt Average 58 m cgt Average 30 m cgt

  25. Deliveries by Country/Region (all types of ships) m cgt contracting Average 18.3 m cgt Average 38.8 m cgt 13.6 m cgt

  26. Average age tanker fleet Years

  27. Tanker trends - fleet, VLCC price, oil demand, and tonne-miles indices

  28. Economics changed

  29. Historical VLCC hire and bunker costs

  30. Bunker price Fujairah and basis bunker price WS 380 Cst $/t

  31. High fuel oil price change economics in shipping • The combination of low freight rates and high fuel prices since 1973 has made it abundantly clear that one can no longer assume constant vessel speed when analysing shipping markets. • Professor Victor Normann/Research Associate Tor Wergeland - Norwegian School of Economics 1977.

  32. High fuel oil price change economics in shipping • Real fuel prices virtually all time high • Fuel costs increased from 20% of freight to 70% of freight in 20 years • Reduced speed periodically equilibrate the VLCC market • Optimum speed for each ship depend only on the ratio of the freight rate to the price of fuel • Consumption profile can vary strongly from ship to ship • High pressure on the industry to reduce CO2 emission • High oil prices has a negative effect on demand

  33. Conclusion

  34. Strategic consideration • World economy, “The risks remain high - the situation fragile” IMF boss Ms. Lagarde • High oil prices despite weakening demand • High bunker prices change economics in shipping • Age >15 years becoming an issue • Shipbuilding over-capacity • Oil demand North America retracting/Asia expanding • Some risks and opportunities cannot easily neither be quantified nor identified - markets are never completely rational nor efficient – success requires the use of sound reasoning and trusting your gut feeling • The only predictable thing about futures tanker market is its unpredictability

  35. Assumptions for optimal speed • Bunker consumption (BC) : Ships should monitor to decide actual consumption (formula developed by MAN) Net freight:

  36. Charterers’ costs Interest rate 5% Bunker $700 per tonne, oilprice 117 per barrel, TC $20,000

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