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Two tier market

The exact timing of when the VLCC market became a two-tier market is hard to pinpoint to an exact date. However, Fearnleys started recording freight rates for SH and DH VLCCs in November 2005 as it became clear that charterers discriminated on hull type - at least for loading in the MEG.

Since the deliveries of the first DH VLCCs some 15 years ago there has been little, if any discrimination on hull type when spot chartering VLCCs. This changed in late 2005 and today we see that SH vessels have to offer a discount in order to secure business. Naturally, the share of DH VLCCs has risen substantially and as of end August, about 70% of the fleet is of DH construction. As a consequence,there is no extra cost in demanding DH vessels as the supply is abundant and one does not run the risk of being "squeezed" in freight negotiations due to a potential lack of suitable candidates. Furthermore, the tanker business, both owners and charterers, have gradually become more HSE conscientious and, of course, if an accident occurs, at least the charterer can claim having fixed a state-of-theart vessel and not the cheapest "banger" available!

 

Now, based on our records we observe that over the past 22 months SH VLCCs have on average been fixed with a discount of 12 WS points for voyages MEG-East in comparison with DHs. 13% of the time, the discount has been more than 20 WS points and the difference has hardly been below 5 WS points. Earnings have on average been about 15,000 USD/day less.

 

Towards the end of 2009 about 110 VLCCs are scheduled for delivery and (before removals) the DH share of the fleet will increase to around 76%. Assuming around 30 SH VLCCs will be converted to VLOC/FPSO, the share of DH vessels will increase to around 80%. Hence the trading range of SH VLCCs will become even more difficult than it is today. During the first half 2007, oil shipments by VLCCs amounted to about 604 mdwt. Based on the shares of DH and SH VLCCs, respectively, one should assume, by and large, that about 30% was shipped by SH and 70% by DH vessels. This is also the case for global VLCC trades. About 74% of the shipments origin in the MEG and al- most three quarters of this volume ends up in Asia. Now, based on our tracking we observe that the DH share in the MEG is only 61% and from the Red Sea (Saudi) the share is even less at 41%. In comparison, the second largest VLCC market, West Africa, has DH share of 95%. The only area with a smaller DH share is inter SE Asia trade; however, this is a tiny market for VLCCs.

 

On the importing side we also observe some interesting patterns. First of all, all shipments to destinations in the Western Hemisphere have a DH share of more than 80%. Excluding the East Coast of Central America, all other Western destinations have a DH share between 90% and 100%. For destinations in Asia, however, we see a completely different picture. Total VLCC shipments into East Asia (excluding Japan) amounted to 173 mdwt whereof 85 mdwt, or 49%, was carried in DH VLCCs. Considering shipments from the MEG only; the share was as low as 33%. Furthermore, for shipments to South Asia (43 mdwt) only 28% was by DH VLCCs and from the MEG alone only 17%.

 

It is quite clear that the majority of SH shipments end up in S.Korea, China, and India and that SH VLCC owners rely on a continued acceptance of SH vessels by charterers and port/terminal authorities in these countries as well as in the oil exporting countries in the Middle East. In our opinion, time is running out and we would not be surprised to see that requirements pertaining to hull type are made more restrictive in the coming 12 months. We expect to see the spread between SH and DH freight rates to widen and it will be increasingly difficult to trade SH tankers in general and SH VLCCs in particular.



02.10.2007
Author: Sverre Bjørn Svenning
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VLCC: Stable
Capesize: Soft
Gas 82,000 cbm: Moderate
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