VLCC owners battling a “100-year storm” should expect rates to get worse with supply and demand to remain out of sync for at least two more years, DVB says.
Wolfgang Driese, chief executive and Chairman of DVB Bank, with Dagfinn Lunde, head of its shipping division.
And given the huge pressure facing owners taking in expensive newbuildings it remains to be seen how many will be left standing, the bank says.
DVB admits the global economic crisis is not doing the tanker market any favours, but the difficulties in the sector can’t be blamed on the financial crisis alone.
“In this ‘100 year storm’, it is necessary for the fleet to get culled as soon as possible with owners being forced by market conditions to exit this sub-sector,” DVB’s analysts wrote.
“However, this is subject to ‘surviving’ owners not taking over ‘distressed’ assets as this will not result in any change in the fleet and thus the only solution to the problem is for the number of vessels to decrease.”
Laying out the huge financial pressure facing owners today, DVB explains a new VLCC cost an average of $154.5m in 2008 and was likely delivered in 2011.
Those lucky enough to have financing for 100% of the ship (and paying 6% interest and with $10,000 opex) would need rates over $60,000 daily between 2012 and 2013 to break even.
This need drops to an average of just under $54,300 daily for the 15 years to follow, the bank’s number show.
“With an expected one-year TC rate average hovering around $20,000 per day for the 2011-2013 period, one can clearly see the extent of the squeeze,” it said.
DVB counts 38 new VLs entering the market in the first three quarters of 2012, with 13 of the slated 23 for the remainder of the year expected to actually hit the water.
For 2013 it predicts no more than 36 of the scheduled 48, including those delayed, to enter the fray.
It said: “Fleet oversupply is an undeniable reality and so is the need for scrapping.
“It is of paramount importance that ordering should not pick up during the next few quarters and scrapping needs to increase, even if it means vessels younger than 20 years old being scrapped.
“Will it get better any time soon? Doubtful. If anything, it will only get worse as new regulations will tilt the scales in favour of even newer and more technological improved tonnage, which as yet shipyards need to prove and are only at the design test phase.”
DVB notes seven of the 13 VLCCs scrapped this year are double hulled, with an average age of 17.5 years.
But to offset the number of newbuildings an average of 23 Vs need to be binned annually until the end of 2014, the bank says.
“Perhaps some owners cannot ‘afford’ scrapping their older tonnage at this point, nonetheless everyone should weight their options carefully going forward,” it said.
VLCC rates have been pushing up in recent weeks as the market enters the winter season.
But, fresh from the bankruptcy of OSG, the bank does not see an easy couple of years ahead.
“The imbalance in demand/supply is bound to continue for the next two years at least, leading to even lower earnings and asset values,” DVB said.
“How many owners will successfully weather this storm remains to be seen.”