The Tanker market in 2003
 

Crude oil transport

Freight market  
        VLCC 
        Suezmax 
        Aframax 
Prospects 
The second-hand market
        VLCC 
        Suezmax 
        Aframax & Panamax 
        OBO 
The outlook 

see also : The transport of refined oil products

At the end of 2002 certain notorious events led one to believe that during 2003 freight rates risked experiencing a continuous decline. 

Thus, whilst the economic climate remained morose within the industrialised countries, the American intervention in Iraq seemed inevitable. At the same time the Venezuelan crisis in addition to the cut in production quotas by OPEC members, made for a grim prospect for owners. 

To reinforce this pessimism, the impact of the 'Prestige' accident promised to lead to a round of drastic measures for older vessels and to further justify a policy of massive orders of newbuildings. 

As we shall see later in the analysis of the different freight rates, the very strong rises in the last quarter of 2002 carried through into the first quarter of 2003 before beginning a steady decline until the fourth quarter, which then saw a strong rebound in freight rates across the board. Consequently, as a whole, the year 2003 was characterised by very firm average rates, often approaching the records of 2000. 

However on a global view, the results of the past year are particularly mixed. Whilst growth has remained extremely limited in Western Europe, one has witnessed a distinct improvement within the US during the second half. 

Elsewhere, emerging countries such as China with a 7 to 8 % annual GDP growth, but also India, have today become particularly influential countries and dominant players in the realm of energy transport

As can be seen in the various tables which follow, there has been a highly volatile market. If 2002 can be seen to have had a sharp decline in the first three quarters followed by a sharp rebound at the end of the year, 2003 has been far more variable. 

The first and last quarters were characterised by a marked tightness in rates, whilst the second quarter saw a progressive drop in activity and levels, to the extent of reaching rock bottom prices during the third quarter. 

An analysis by sector helps to understand the reasons of such variations, and will allow us to try to make some short and medium term projections. 

However, before studying in detail each of the three principal categories of crude oil transport, we should briefly examine the major change which intervened within the chartering practices and which were confirmed in 2003. The impact of the 'Prestige' incident has definitively and radically transformed the attitude of players in the market, even though the main owners had largely modified the regulations since the 'Erika' incident: with a more rigorous policy of selection ('vetting'), a priority for double-hulled vessels, etc. 

A number of producing and consuming countries have also begun the process this year of officially adopting these measures. As an example, countries such as Tunisia, Algeria, and Morocco have suddenly switched from a somewhat liberal chartering policy to a stricter supervision and, as from now, will only accept vessels less than 15 years old into their ports. 

And finally the European Community, largely bypassing the previous decisions of the IMO in the progressive elimination of old vessels, has forbidden as from October 21^st single-hulled vessels carrying fuel oil or heavy crude into its ports. 

The combination of these measures, bringing into line steps already taken by the US, only serves to increase the gap with countries of the Middle East and the Far East. As we shall see in our conclusion, this is likely to be a temporary situation and we shall probably witness a general uniformity of security measures in the years to come.
 

The strong surge in rates during the last quarter of 2002 was due to several factors: the expected American intervention in Iraq, the traditional period of building up stocks, and the repercussions of the 'Prestige' story. 

These factors prevailed throughout the first quarter of 2003, before beginning a steady decline at the end of the advance of American troops in Iraq.

Freight rates then were particularly affected during the summer with returns below $20,000 per day, without however hitting the lowest levels experienced in 2002. 

As from September, assisted by an increase in demand, an excess over OPEC's production quotas and the restart of Iraq exports from the Gulf, rates began to rise strongly. Variations started to become erratic with considerable fluctuations from week to week. Consequently dependent on specific demand, one saw levels changing within days from WS100 to WS52.5 for voyages to the West, then jumping to WS120 in less than 10 days! 

As a result, over the whole of 2003 and on the three routes that we use as reference, the average return of a modern VLCC was $52,000 per day whereas it was only $22,500 per day in 2002. 

We noticed a marked increase in the trend already noted in our last two reports, namely a shortening of voyages with a smaller share of movements Middle East Gulf / West, a strong increase in voyages Middle East Gulf / East (and in particular to China) and an increasing market share of movements from West Africa, with again a greater proportion of traffic moving East and notably to India. 

With respect to the evolution of the fleet, today we can count 445 VLCC / ULCCs, of which nearly 60% are less than 10 years old and are therefore double-hulled. 74 new units are due to enter the fleet in the next 2 years. 

Despite these figures and the 'risk' of seeing orderbooks fill up again in 2006, as we shall see in our conclusion, this does not automatically imply a discrepancy between supply and demand such as we have seen in previous years'

The results of the past year are similar in all respects for this category of tankers to those of the larger size. Even if the wild variations have not been so evident as with the VLCCs, the fluctuation in the graphs corresponds to the same factors. 

In the wake of the last quarter of 2002, the first three months of 2003 enjoyed strong levels before starting a steady decline and reaching the bottom during the summer. A sustained demand in transport across all geographical zones during the last quarter saw levels jump back up to record highs.

Even more than in previous years, one can see evidence of the major role played by the Mediterranean market. Despite the temporary stoppage of Iraqi exports from the Turkish terminal in Ceyhan, the share of movements from the Black Sea has become preponderant and the opening of new terminals has considerably increased export volumes.  

This recurrent new phenomenon, the conditions imposed by the Turks concerning the transit of the Dardanelles and the Bosphorus, today distort the balance of this market. Consequently with the coming of winter and bad weather, the restriction of daily transits to three units of more than 200 metres, for each direction and for each of the two straits, results in real bottlenecks. With the return voyage stretching beyond 20 days in winter months, the market is totally disrupted. 

It is no longer just a question of demand causing a rise in rates, but purely and simply a matter of limited supply. This artificial phenomenon also strongly affects the Aframax market as we shall see later and can only be resolved progressively with the coming into service of oil pipelines feeding directly into the Mediterranean. 

Even though voyages are relatively short, one can note a considerable improvement in returns for owners. Thus, on a Sidi Kerir/Fos voyage, the average rate for 2003 has been WS153 for an equivalent time charter rate of $50,600 per day. By comparison the levels were only WS102 and $27,475 per day over the period 2001/2002. 

The major role played by VLCCs today in West African exports, makes this market somewhat hazardous for Suezmax owners. Nonetheless, the American economic recovery has allowed for an increase in movements and rates at the end of the year. This has helped stop the drop in freight rates seen in the 2^nd and 3^rd quarters and to produce an average annual rate of WS135 for a West Africa/Gulf of Mexico movement, with an equivalent time charter of $35,000 per day (respectively WS110 and $29,830 in 2001, and WS79 and $18,270 in 2002.) 

The other notable phenomenon has been a strong rise in demand for such sizes out of the Middle East Gulf. Faced with a temporary shortage of VLCCs at the end of the year and healthy freight rates, some owners even went to the point of dividing cargoes into two lots of 1 million barrels. On voyages to the Far East, rates for modern vessels went up to around WS165/170, whereas for the same period in 2002 levels were WS100/110.

The Aframax category has also largely benefited from the overall good level of activity and has registered throughout all geographical zones freight rates well in excess to those of the previous year. 

In the European zones (North Sea and Mediterranean), the confirmation of tighter security measures taken both by the charterers as well as the governments themselves has largely contributed to this improved situation. 

Once again, we can observe a general evolution of rates in line with those of the larger categories. The only critical period for owners was during the summer with daily returns averaging around $10,000 per day. However, on the two voyage routes as shown in the hereafter graph, one can see that the average return for a modern vessel was $42,300 per day over the year. 

In respects to the North Sea market, it is important to point out the preponderant role played by Russian exports out of the Baltic. As this is a zone particularly subject to ice conditions in winter, the few ships, which carry the classification norms of 1A and 1B, help push the rates to extreme levels and have a knock-on effect for all other movements.

The Mediterranean market, as for the North Sea, is largely dominated today by the presence of modern double-hulled vessels (more than 85% of ships regularly in this zone). The older tankers, if they have not been demolished or sent East of Suez, are still chartered by certain Russian companies (but for how long now?). 

If a balance between supply and demand remains a critical objective in order to judge the level of a market, one must nonetheless note the growing consequences of the measures taken by the Turkish government on the question of the transit of their straits. Thus, in parallel with a strong increase in demand for exports from the Black Sea, the phenomenon of saturation in movements around end 2002 / early 2003 was again experienced as from October 2003. The resulting delays tend to increase the movements out of North Africa and, taking advantage of the artificial shortage of tonnage, owners rack up substantial profits' 

The Caribbean market remains closely linked with the economic situation of the US. On the typical 70,000 tons movement Caribbean/Gulf of Mexico, the market which was at its lowest at the beginning of the year, reacted very quickly to the Iraqi and Venezuelan crisis during February and March, to hit very high levels, WS395 for an equivalent time charter of $73,750 per day and then plunged rapidly. As for other size of tankers, the summer months were particularly dull and rates plummeted to average only $18,000 per day during the months of July and August. The effect of the American economic revival at the end of the year had an immediate effect on rates, which have hardly stopped rising right up to the end of the year. 

Finally, on the Middle East Gulf / Far East movements, the predominance of old vessels weighs down on freight rates. Only the influence of the strong rise in rates which VLCCs and Suezmaxes established at the end of the year, enabled average levels to improve and to reach WS167 or $27,400 per day for the whole of 2003.

It is worth noting that despite strong increases in rates, which owners have been enjoying in 2003, this has not incited them to abandon the spot market to engage in longer term contracts. 

For example, one can estimate that for modern vessels during the last quarter, the minimum rate required for a 2 year time-charter would work out as follows: VLCC $32,000 per day, Suezmax $25,000 per day, and Aframax $22,000 per day. 

As a consequence of the improvement in rates to some extent, but above all of the rejuvenation of the fleet, the figures for scrapping are lower than the two previous years.
 

Numerous observers might believe that because orderbooks are full up to 2006, there is a risk of imbalance and consequently a potential fall in rates. Between 2004 and 2006, 74 VLCCs, 70 Suezmaxes, and 151 Aframaxes should enter the fleet. 

Despite these figures we believe that at least up until 2006, average freight levels should not suffer substantial drops. 

Outside the impact of global economic factors and the probable evolution of energy needs, two items in particular lead us to believe that such a prospect is justified: 

The dramatic accident of the 'Tasman Spirit' in Karachi, even if no responsibility can yet be objectively placed on the vessel itself, will almost certainly have consequences on the overall control of tanker movements within this geographical zone. 

Being increasingly conscious of the maritime safety measures already adopted by Americans and Europeans, a good number of countries in the Middle East and Far East today are beginning to realise the extent to which they are burdened by a high proportion of old vessels. One should therefore expect to see the introduction of stricter measures on maritime security in this area in the months to come. Thus, a not negligible number of new ships will tend to stay in these zones replacing the older ones, which will be scrapped. 

In conjunction with this situation, it is interesting to compare the figures, indisputably impressive, of the renewing of the world fleet with the evolution of stricter chartering policies, which are being imposed on market players. If we take into account the evolution of the main criterion of choice of charterers, we can compare, in following graph, the evolution of what we can qualify as 'eligible fleet'. 

At the end of 1998, the principal charterers only applied one criterion of age (25 years old) in order to eliminate, in theory, ships at most risk. From the end of 2000 till the end of 2002, this age limit was reduced to 15 years. As from 2004 the main charterers are only prepared to be involved in double-hulled units. 

This graph speaks for itself and shows that the programmes for a massive renewal of the fleet does not, for the moment, pose a major risk on the imbalance of the market. As a result, with the exception of the Aframax fleet, which will recover a very high level by the end of 2006, the growth of the whole of the 'eligible fleet' remains relatively moderate with regard to the foreseeable growth in demand.
 

If one adds to these objective criteria the probable prospects of an increase in the energy needs, notably of the emerging countries, nothing prevents one from being able to contemplate a favourable climate for owners prevailing for the next two to three years.