Freight Rates To Fly High In Coming Years

The U.S. will become more dependent on tanker-borne petroleum imports in coming years, coinciding with a ship shortage, that will push freight costs sharply higher, energy and tanker analysts said. "Products imports are playing a bigger swing role in the U.S. than ever before," Paul Horsnell of Oxford Institute of Energy Studies said.

"They're becoming a structural feature of the U.S. system." Horsnell told members of the tanker owners' organization Intertanko that each year was now expected to bring a fourth quarter surge in demand for fuel oil imports — a trade usually served by Panamax 50,000 tonrs. U.S. demand for gasoline imports would surge each spring. He also forecast dramatic increases in demand for Aframax crude tankers (75,000- 120,000 tons), many of which trade to the United States. Last year, Aframax freight rates hit their highest levels in 30 years, doubling or even tripling over the course of the year in most markets. The biggest gain was seen in the Caribbean, where rates nearly quadrupled between January and the year's high point in November of $2.30 per barrel for up-coast cargoes.

basically as a consequence of the strong growth in Middle East exports.

Based on tanker tracking data, Middle East exports were five percent higher in 2000 than in 1999. Crude exports increased by as much as eight percent, while exports of refined products seemed to have dropped by exports by more than 15 percent. This sharp decline is partly a result of the temporary shutdown of a large Kuwait refinery after an explosion in June, and partly a consequence of the rapid refinery expansion in Asia.

Exports from the FSU have risen sharply in 2000 due to a combination of the considerable output hike and a marginal decline in consumption. Other regions experienced only moderate changes over the previous year.

Crude imports to China doubled from 1999 to 2000 from 0.7 mbd to 1.4 mbd and accounted for more than 40 percent of the global inter-area growth in seaborne crude trade. Imports into other Asia and to the USA constituted most of the remaining growth in seaborne oil trade.

As already mentioned there must have been some other factors in addition to oil volumes and transport distances, contributing to the tanker market upswing. The most important among them is without a doubt the so-called "Erika Effect": Charterers' reduced acceptance of old tankers after the Erika accident in December 1999. According to our calculations this effect represents a three to four percent reduction in the total transport capacity of the total tanker fleet. The Erika Effect has been the strongest for Suezmaxes and Aframaxes.

In addition R.S. Platou has seen an unconventional trading pattern for tankers in 2000 that also led to reduced fleet productivity. This was mainly a consequence of low oil inventories and the persistent backwardization in the oil market. It is estimated that the "Erika Effect" combined with the unconven- tional trading pattern and other factors, have caused rates for crude carriers to rise by $10-20,000 per day as an average for the whole year.

The Fleet The active tanker fleet increased by 1.6 percent from 1999 to 2000, calculated on an annual average basis. The active VLCC fleet increased by only 0.5 percent, while the rest of the tanker fleet grew 2.5 percent.

Deliveries of new tankers reached 21 million dwt in 2000, unchanged from 1999. There was a rise in removals from 13 million dwt in 1999 to 18 million dwt in 2000. Some 14 million dwt of tankers were sold for scrapping, and 25 units of these were VLCCs.

In R.S. Platou's capacity utilization rate calculations, tanker utilization rate has risen from 82 percent in the fourth quarter of 1999 to 93 percent in the fourth quarter of 2000. Utilization in 2000 was, as an annual average, close to 90 percent up from 84 percent the previous year.

According to the current order book, 15 million dwt of new tankers will be delivered in 2001. That is five million dwt less than in 1999. Scrapping of tankers is mainly determined by running and expected freight rates with age distribution as the second most important explanatory factors. The recent IMO draft to phase out old tankers will most likely be sanctioned in April 2001 leading to substantial removals from the fleet in the next five years.

The first date at which old tankers will be excluded according to this new regulation, however, seems to be January 1, 2003. We expect tanker scrapping in 2001 to stay at the same level as in the second half of 2000.

Based on these assumptions the active tanker fleet will increase by 1.5 percent from 2000 to 2001 on an average basis, with higher growth for VLCCs and lower growth for medium size and small tankers.

By Erik M. Anderson. R.S. Platou Economic Research a.s..

. as excerpted from The Platou Report 2001