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 The tanker market in 2001 |  
 | The crude oil transport |  
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 | Our conclusions in the last annual report
 ended on a relatively optimistic note. On the basis of forecasted economic
 growth on one hand and the expected movement of deliveries and scrapping
 within the fleet on the other hand, it was predicted that there should be
 an effective balance between supply and demand up until the end of 2002. It was logical that there should be a technical adjustment to freight
 rates after the unreasonable (?) levels reached in 2000. Nonetheless the
 general opinion was that they would remain favourable to owners for a
 further 18 / 24 months. As we shall see later on, this optimism was quickly beating a retreat.
 The economic indices were turned upside down and the negative results that
 followed were magnified by external factors both of a dramatic and
 unexpected nature. It is clear that in the current climate, optimism has taken a back seat
 for 2002 and even 2003, which look like being difficult times for owners.
 The massive orders of the last two years have not been matched by the
 anticipated demand. The effect of the economic recession, even
 short-lived, will cause a dramatic drop in the rate of new orders and
 probably help to accelerate the number of vessels being scrapped. As has been traditionally the case, the wild swings which are
 characteristic of this market produce freight rates which seem incapable
 of remaining stable either in the medium or long-term. After a quick study of the macro-economic factors that have marked this
 past year, we will look at the effects in each of the main size
 categories. We will attempt to show, beyond the justified short-term pessimism, the
 reasons why we believe this will be a relatively brief period and that it
 should not undermine our longer term view that we gave in our last report.
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 | Reasons
 for the downturn |  |  
 | After record growth rates in 2000, the
 industrialised countries experienced a leaner year in which the indicators
 quickly turned from rosy to gloomy. Forecasts for the main economic
 indices were continually readjusted downwards throughout the year. 
 
 The American market which has been the leading participant and driving
 force over the last two years in the highly active freight market got hit
 badly. The first signs of an economic slowing down, then of a recession,
 were visible well before September 11th with notably some alarming
 unemployment figures. The wave of terrorist attacks on September 11th,
 beside their despicable nature and the geopolitical consequences, only
 served to brutally reinforce the sombre mood and even add a touch of
 psychosis. However, as already remarked by a number of commentators and taking
 into account the American spirit, the current crisis, while an undeniable
 fait accompli, should nonetheless be of a relatively short duration. Outside the U.S., all industrialised countries have readjusted their
 forecasts and lowered their growth rates, without citing Japan which is
 still languishing in the doldrums' However even if other countries do not foresee their growth as being so
 severely affected, there can be little doubt that short-term prospects do
 not augur for sufficient energy consumption in the current market to
 offset the tonnage supply which has swung into surplus. In view of this sudden drop in demand, oil prices have followed suit.
 As can be seen in the following graph, the repeated efforts of the
 producing countries to stimulate prices by turning off the taps have not
 met with much success. A few conclusions can be drawn from the following graph: 
 After having frequently risen above $30 per barrel in 2000, crude
 prices for the year will average out at near to $25 per barrel.The drastic measures taken by OPEC members to reduce production
 quotas successively have had only a short-lived effect on crude
 prices. The September 11th events plunged markets into a profound
 apathy and prices quickly collapsed. Realising that a sudden further
 reduction on production quotas would have little effect on prices, the
 producing countries waited and now are placing their hopes on a new
 reduction of 2 million barrels per day (1.5 million OPEC, and 0.5
 million non-OPEC) as from January 2002. If this policy is respected by
 all it should allow prices to consolidate around $20 per barrel. However it is also clear that playing around with supply is not enough
 so long as demand in the current economic climate has not picked up to
 normal and regains a sustained growth rate. Faced with such drops in production and therefore in demand for
 transport, owners can no longer pretend to be able to maintain freight
 rates for long. We shall see further on that certain categories are
 suffering more than others.
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 |  | Besiktas 164,626 dwt, blt 2001 by Hyundai HI, owned by Besiktas Denizcilik
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	  |  
 Effects
 on the freight rates|  |   | 
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 It is without question this category which is the most exposed to the
 tightening measures being imposed by the producers. Directly dependent
 on liftings from the Middle East Gulf, the rates have very quickly taken
 a dive. With the exception of three jolts of varying degrees, the fall in
 rates has been sharp and painful. Taking all routes into account, in the
 course of the year equivalent time charter rates have slumped from
 $80,000 per day to $20,000 per day.
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 One can clearly see in the graph (and as evidenced elsewhere) that
 the events of September 11th in the U.S. have had a substantial impact. Proof of the underlining weakness of the current market in contrast
 to the year 2000 is that voyages to the Far East (which are the most
 active for this size of vessel) have triggered and helped accentuate for
 the most part this drop in rates. The Japanese and Korean oil companies' owned fleet have not been
 employed 100%, and these 'relets' heavily weighed on further
 depressing the market and largely explains the strong drop in rates on
 these routes.
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 Without actually offsetting the loss of traffic on liftings out of
 the Middle East Gulf, there has been again this year a very strong
 increase in combined cargo movements from West Africa with Far Eastern
 refineries as the main destination. While such movements serve as a safety valve for VLCC owners in the
 difficult times that they are now experiencing, this business as we will
 see later on, is being done to the detriment of the traditional traffic
 which belonged to the Suezmax size. The new drop in crude oil production of 1.5 million barrels per day
 decided by OPEC with effect from January is likely to keep an already
 weak global market under pressure, compounded by a supply of tonnage
 which is growing both quantitatively and qualitatively. The orders for newbuildings which were made in euphoric mood
 immediately after 1999 will start weighing heavily in the forthcoming
 months. Only an increase in the number of scrapping of the oldest units
 can give any hope to owners. Two other factors which are not helping freight rates are: 
 Tankers which are oil company operated are no longer guaranteed to
 find full employment and will continue to depress the market.The policy of pooling which seemed last year to be a stimulating
 factor for freight rates, is now causing various commercial
 difficulties. In many cases we have already seen that the pool has
 no option but to anticipate and even exaggerate a drop in freight
 levels' |  
 
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 As with the VLCC, the turnaround in the tendency between 2000 and
 2001 was sudden and resulted in a rapid deterioration in the general
 state of the market. Time charter equivalents that were frequently above $60,000 per day
 at the start of the year slipped in some cases at the end of the year
 below $20,000 per day. Nonetheless the greater flexibility which
 characterises this category of tankers has allowed owners to stabilise
 their minimum returns at proportionally better levels than the bigger
 sizes. As comparison, average returns in 1999 were only $15,000 per day. |  
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 As already stated in our previous report, the West African market no
 longer plays a predominant role as pacemaker. As mentioned above, VLCC
 are responsible for this and two 1 million barrels lots are more and
 more frequent not only in movements to the East but also towards the US
 and Europe. However activity for other destinations in this size category of ship
 is regularly increasing and allows owners to ensure a much better
 balance on employment. The North Sea and the Caribbean markets remain relatively on the
 sidelines. The Middle East Gulf tends to favour the older category of
 ships. The Mediterranean is experiencing a surge in activity. Liftings from
 the 'Sumed' pipeline outlet are stable and risk staying that way due
 to the competition of the low VLCC levels. In addition, Irak crude out
 of the Ceyhan terminal, so long as the United Nations 'oil for food'
 agreements continue, is favourable to the Suezmax size. Liftings of Russian crude (or from CIS countries) out of the Black
 Sea are in constant progression. Due to the technical constraints
 imposed, modern vessels are required and these fixings serve as a
 barometer of the market more and more. Analysing the graph which gives
 returns on different voyages both in 2000 and in 2001, shows that the
 Mediterranean zone often acts an accelerator in a rising market or a
 brake in a falling one. As with the VLCC, the policy of pooling put in place these last few
 years helped stimulate the market in 2000. However in today's climate
 of economic recession, it plays a prominent role in the weakening of
 rates. It is a case of doing everything possible to prevent
 non-employment of their fleet, which appears today to be in large
 surplus.
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 Even more so than the Suezmax size, the great flexibility of the
 Aframax category allows owners to limit the impact of the economic
 crisis which we are currently experiencing. The analysis of the evolution of returns on the main routes shows
 once again the strong downturn in levels after the peaks reached in 2000 |  
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 One notices however that in general, the drop is less for this
 category of vessel. Even if rates have plunged from $50,000 per day at
 the beginning of the year to about $20,000 per day at year's end, the
 floor level (for the moment) has proportionally less of an affect on
 owners for this size compared to the larger sizes. As additional
 evidence of this stronger resistance: at the end of 2001, a 12 month
 time charter is negotiated at around $22,000 per day for a modern
 Suezmax and still $20,000 per day for a modern Aframax. The inter-North Sea activity continues to be marked by wild
 fluctuations but with peak demand and rates for liftings recurring
 end-month. As a general rule, the Mediterranean has produced the best results
 for owners with equivalent time charters above $30,000 per day on
 average over the year. Despite a lessening in demand, charterers have to
 be on their toes in this zone. Availability of quality ships remain
 precarious and obliges the charterer to cover his needs two to three
 weeks in advance with all the incumbent risks. The still important
 number of ships over 20 years, even 15 years, prevalent in this area has
 no longer an impact on freight levels. In practice, the drastic security
 measures taken both by governments as well as oil companies ensures that
 only units less than 15 years reflect a true value of this market. The diversity of movements and the large number of intervening
 charterers operating in the Mediterranean are supplementary reasons for
 the healthy level of rates in this market. In the current climate of low freight levels, owners of older vessels
 must choose between waiting longer and longer between fixing, going off
 to join the ever expanding numbers of such ships in the East, or sending
 them voluntarily for demolition.
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Shipping and Shipbuilding Markets in 2001 
I N D E X
 
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