"Quo non ascendent!" : how far up will it keep going!
 

If the price of tankers progressed overall by 20 to 35 % between the end of 2002 and the end of 2003, they experienced an increase in the order of 50 to 60 % between 2003 and 2004 for the more modern double-hulled tankers and up to 100 % for some of the single-hulls, aged between 15 and 20 years old. It has been the explosion in the daily returns which quite logically has caused this phenomenal appreciation. During the year, owners were continuously on the horns of a dilemma between the desire to profit from these colossal returns and the desire to make some cash by selling off their assets. This dilemma only got worse during the months: prices and returns increased, the less opportunities there were to seek out alternative investments. In fact, the evaluation of other types of ships followed the same tendency, as was the case with bulk carriers and containerships as well as gas carriers and,, to a lesser extent, chemical product carriers.

The rocketing rise of daily returns was thus the main cause for the increase in values but also contributing was the demand forecast for China and India which incited a good number of owners from these countries to rush massively into the second-hand tanker market. In fact, they were quite aggressive and clearly contributed to the spiralling prices. Their thirst for tonnage even allowed some smart operators to buy and re-sell the same ship in the course of the year, and realise very substantial gains. Chinese and Indian owners have thus gained a foothold in this market and are showing to all that they have no intention to leave the care and attention of transporting crude and oil products, which the economic growth of their countries requires, to third-party players.

Another factor determining the rise in the price of second-hand tankers this year is the increase in the newbuilding price of ships, combined with the late delivery dates being proposed by shipyards (2007 and 2008). Consequently a number of modern ships with prompt delivery dates have seen their values increase substantially sometimes over the contract price for a new vessel.

Two other elements have characterised the year 2004. First there has been a noticeable increase in the number of en-bloc transactions comprising at least three ships: with only seven transactions some 32 units changed hands. Teekay and Genmar were particularly active in this type of business as they were involved in five of them. The companies mentioned were in this way able to respond to their shareholders expectations either by realising short term profits or else by showing their strength and their desire to expand. The other significant factor was the unexpected effect that the explosion of spot freight rates had on German KG buyers. The latter have been very active over the past two years, but have had to abandon their role as principal player to others this year due to prices being too high in comparison to the long term charter rates that the KGs could obtain on the market. Whilst the spot rates went through the ceiling, the long-term charterers (3 years and more) did not follow the levels being asked by owners. Without a safe charter back, numbers of KGs were forced to abandon this sector.

This segment of the market saw very sustained activity, the volumes of transactions exploded as from May and prices took off. The volume virtually doubled compared to last year. We registered no less than 82 sales (for further trading) of second-hand VLCC, which actually only concern 76 ships as 6 of them changed hands twice during the year. It should be noted that only 44 units were sold in 2003, 24 in 2002 and 37 in 2001.

Logically in view of their small number, very few ships from the '70s changed hands. Only four VLCC of this generation were sold for storage projects, such as the t/t 'Folk Sun' of 323,100 dwt, built in 1979, for a price in the region of $ 19.5 million.

By contrast, we saw a real plethora of sales of single-hull units built between 1980 and 1995, as 51 changed hands this year compared to 18 during the previous year. If the buyers of 2003 were for mostly Greeks, they cleverly came out as discrete sellers in the course of 2004, placing their ships with Far Eastern buyers showing once again their astute sense of timing. As an example, we can cite the sale of m/t 'Progress' of 238,898 dwt, built in 1987, going to buyers in Hong-Kong for a price of $ 49.7 million in December 2004, whilst its acquisition price in September 2003 was around $ 16.5 million. Some operators succeeded in buying such ships at the beginning of the year, operating them very successfully for several months on the spot market, to finally sell them several months later with a considerable profit. Such was the case of m/t 'VL Venus' of 238,770 dwt, built in 1986, bought in January for $ 18.0 million and sold in June for $ 24.6 million. It should be pointed out that buyers of VLCCs for conversion are increasingly considering this age category, given the virtual disappearance of the previous generation of ships. It is the reason why three units out of the 51 sales left the fleet to become FSO or FPSO, such as m/t 'Apollo' of 257,882 dwt, built in 1981, sold for conversion at a price of around $ 20 million.

The number of double-hull VLCCs built after 1993 sold this year was also higher, even though not quite as dramatic, since we have registered 31 sales in 2004 as against 23 in 2003, only 5 in 2002 and 14 in 2001. We can easily understand that owners of these ships have shown a greater resistance to the temptation of selling, since the double-hull vessels have a longer life expectancy, and furthermore the hull configuration meets today's norm to which the most exposed charterers have to conform. We could cite as an example the sale of m/t 'Oriental Topaz' of 319,430 dwt, built in 2002, for a price close to $ 116 million (for prompt delivery), whereas the cost of ordering a new ship at the same time is some $ 10 to 15 million less. Amongst the 31 transactions, there are 6 contract resales of which in June the en-bloc one of the hulls 1,540 and 1,541 of only 260 000 dwt being built at Hyundai Heavy, for delivery at the end of the year for $ 92 million each.

This year, only 5 ULCC/VLCCs went for demolition against 29 newbuildings coming into the fleet. This figure is falling compared to the 27 and 36 units demolished respectively in 2003 and 2002. The rising freight rates as well as the very small number of ships still in service and affected by the phasing-out of single-hulls explains this minimalist figure. It should be contrasted with the 105 units which are due for delivery between 2005 and 2009.

This size category, namely from 120,000 to 200,000 dwt, did not benefit from an increased volume of transactions comparable to that of the VLCCs. Nonetheless the price increases were similar since, in line with the VLCCs, single-hull units saw their values virtually double while those of double-hulls only went up by 55 to 60 %.

While we were able to count 53 sales of Suezmax in 2003, the year 2004 only saw 43 units changing hands; actually 45 transactions as two ships saw three different owners in the course of the year. This sector of the market was particularly susceptible to en-bloc transactions and was highly favoured by NYSE listed companies.

For the first time, and quite logically, no ship built in the '70s changed hands (for further trading) since these should be phased-out of the fleet next year at the latest. They have not altogether disappeared however since some are waiting for storage projects.

As to the single-hulls built between 1988 and 1993, we saw 15 transactions concluded in 2004 (for 13 ships) which was a similar figure to that of last year. There was the noteworthy en-bloc sale of three single-hulls - the 'Genmar Transporter', 'Genmar Traveller' and 'Genmar Centaur' of 142,031 dwt, built respectively in 1989, 1990, and 1990 for around $ 66.3 million. In addition also significant was the sale of the m/t 'Sandra Tapias' of 147,253 dwt, built in 1991, which formed part of an initial en-bloc transaction in March and was then resold in September for a price around $ 28 million. Finally, as with the VLCCs, nearly all the sales of the single-hulls were concentrated in the second half of the year when the values were at their highest.

As was the case last year, the majority of the deals concerned modern double-hull ships, namely 30 compared with 37 in 2003. The unusual aspect for this type of Suezmax was the high proportion of these sales, some 26 out of the 30 units, featuring in en-bloc sales. Is this size category therefore signalling profound changes in owners' attitudes? It is not certain, since the reason for this concentration is mainly due to the accessibility of funds with the New York Stock Exchange rather than a real desire on the part of owners. The next downward cycle, which will inevitably arrive sooner or later, could well herald an end to this type of operation. As an example we can cite the sale of the m/t 'Aegean Lady' and 'Aegean Eagle' of 165,000 dwt built in 2003 for a price of $ 70.3 million each.

The number of Suezmax sold for scrap this year was identical to that of last year namely 10 units, compared with 15 in 2002. Twenty-six new ships entered the fleet in 2004, but 86 already figure in the orderbooks of shipyards over the next 5 years!
 

The number of second-hand transactions for Aframax also was significantly higher this year since we have registered 85 sales in 2004 as against 70 during the previous year (and only 35 in 2002). Ships included in this category are vessels of 60,000 to 80,000 dwt with a beam of more than 32.2 metres.

As with the Suezmax, we observe that for the first time there have been no transactions (for further trading) of Aframax built in the '70s.

The split between sales of single-hull Aframax built between 1980 and 1993 and sales of double-hulls built after 1990 were nearly identical. The first registered 45 transactions, whilst the double-hulls reached the figure of 39 sales, including 11 resales. The single-hulls from the early '80s found buyers in the Far and the Middle East, where regulations do not require double-hulls for transporting dirty products and crude oil yet. The sales of ships in this generation were concentrated in the first part of the year, even though the prospects of this market were most encouraging. We can cite the sale of the m/t 'Montrose' of 85,619 dwt built in 1981, sold for $ 7.5 million, and the en-bloc sale of the m/t 'Spectrum' and m/t 'Solaris', of 96,000 dwt, built in 1985, for about $ 16.5 million each. The huge difference in price between these two sales (not double-hulls) despite a small age difference (4 years), can be explained by the fact that the 1981 ship, if the latter is not SBT (Category 1 OMI) or SBT but does not conform to the IMO 13-G ter norms, should be phased-out next year, whereas the 1985 ship which is SBT (Category 2) can navigate up until 2010.

The modern double-hulled Aframax were again in strong demand, since 39 of them changed hands. This figure would have been higher without doubt had owners not preferred to employ this type of ship on the spot market rather than to sell them, despite the exceptional prices being proposed by buyers desperate for tonnage. We can note the sale of the m/t 'Seachem' of 95,621 dwt built in 1993 for about $ 30.5 million as well as the sale of a ship under construction with Daewoo to be delivered in January 2005 for a price of $ 62 million. In addition this category of ship was the only one which got the attention of the German KG buyers, since they bought 11 of them of which the hulls 1,467 and 1,468 deliverable at the end of 2004 by Samsung which were sold for a price of $109 million en-bloc.

Thirty Aframaxes were demolished this year, as compared to 35 the previous year and only 20 in 2002. This is in contrast to the figure of 55 ships delivered in 2004 and the current orderbook comprising to date no less than 182 ships to be delivered from 2005 to 2008.

The second-hand market for Panamax tankers

Panamax ships by comparison witnessed a far more modest volume of business than larger tankers. Twenty-nine units changed hands against 45 in 2003, 11 in 2002 and 22 in 2001. The breakdown by age was about a third for single-hulls built between 1981 and 1987 (9 sales) and two-thirds for double-hulls built from 1985 to 2006 (20 ships of which 8 were resales). The following significant sales were done this year: the m/t 'Nile' 65,755 dwt built in 1981 sold for $ 5.2 million, the m/t 'United Will' of 68,961 dwt double-hull, built in 1992, for $ 25.3 million and the m/t 'Tavropos' of 70,000 dwt, built in 2004, sold for $ 45 million (compared to a similar Panamax built in 2003 and sold for $35 million in 2003!). This category has remained the darling of the German KGs, who showed the same appetite for this type of tonnage as they did last year. The investment amount, the age of the ships concerned and the charter party rates which can be obtained, make Panamax vessels attractive to investors.

With thirty-five ships of this category added to the fleet in 2004 and an orderbook totalling 168 ships at the end of the year, the market should see an increase in demolitions in order to remain healthy. Thirteen Panamax were sold for demolition, only two less than the previous year despite the surge in rates. It is difficult to predict whether we shall see an increase in the Panamax going to the scrapyards in 2005, as a large number of existing ships over 20 years are SBT.
 

This market continued its return to fortune started in 2003 and again benefited from the interests of both bulk and tanker owners. The reluctance of certain charterers as to the OBO configuration was gradually discarded with the progressive rise in rates. Thus, the volume of transactions as well as their values logically increased.

In line with last year's figures, 23 ships changed hands. We should recall that only 9 and 11 sales were reported in 2002 and 2001. To illustrate this revival, we can mention the sale of the OBO 'Snapper' 135,160 dwt, built in 1982, which changed hands in 2003 at a price of $6.1 million and was resold in 2004 for a price of $ 15 million, with a charter attached for only one year at a rate of around $ 27,000 per day.

We must also mention a major transaction in this market since the 10 OBO, 'SKS Tyne', 'SKS Tana', SKS Tweed', SKS Tugela', 'SKS Tagus', 'SKS Trent', 'SKS Torrens', 'SKS Tanaro', 'SKS Tiete' and 'SKS Trinity', which belong to a joint venture composed of two owners, were taken over by one of them for an en-bloc value of $ 150 million (basis 50 %). These ships are 110,000 dwt and built between 1996 and 1999.

We have seen 4 OBO sold for demolition this year, as against 5 in 2003. As of now, the orderbook is non-existent.
 

Above all it should be remembered that in 2005 tankers, which come under the Category 1 OMI (pre-Marpol and non-SBT) will leave the fleet as well as those in the Category 2 (post-Marpol SBT) built before 1978. Ships in this second category built afterwards will leave the fleet progressively as from 2010 and/or 2015 based on their classifications and flags.

The lack of demolition observed in 2004 and the increase in the tanker fleet capacity, due to the massive deliveries of new tonnage, should most probably change the equation in the medium term. Values should logically see the start of a decline during the course of 2005, if demand for crude in general and in China in particular does not match the levels of 2004. Nonetheless this weakening will take time, as history shows us that owners have a capacity to resist selling their assets at reduced levels. This capacity to resist will be sustained by the vivid memory of peak prices obtained in 2004 and the large margin that owners enjoy at the current spot rates. The volatility and the instability of rates seem now to be facts to which owners are getting accustomed and their accumulated reserves will allow sellers to take a more relaxed position. Perhaps in 2005 we shall see some prudent or far-sighted owners disposing of some first generation double-hulled ships thus cashing in on their current valuation.

Europe is looking into the need of penalising more severely certain forms of pollution, but a consensus between the 25 member states seems a distant prospect. We regret yet again that the discussion on the concept of "place of refuge" is not clearly written into the agenda and is not currently being examined. At the expense of being simple and efficient, it should remain a top priority for each state and the E.U. if they really want to minimise the consequences of the perpetual possible future accident of either single or double-hulled ships!