The transport of Refined oil products
in 2000

Even though it was reasonable to think that by the end of 1999 the market had reached the bottom, nobody could have imagined that within the space of a year that product tankers, across the board, would triple their average daily returns.

Certainly the 'Erika' affair had a direct and decisive impact on the demand of product tankers especially in the Atlantic zone, as it brought about the disqualification of the older vessels (35 % of vessels of 30,000 dwt are more than 20 years old). But it was not just this "affair" which alone can explain the repercussions on ships quite different both in size and quality from the 'Erika', and operating in areas where pollution problems are much less sensitive than in the Atlantic.

In fact the strong recovery of the Asian economies, the American growth which was stronger than predicted, and the good performance of Europe caused an unexpected rise in transport demand. Concerning refined products, the policy of tight inventories helped to magnify the imbalances and hence exaggerate the upward trend.

In 2000 the freight market for product tankers reached record levels in a period outside a major political crisis.

The returns on ships of this size which were stagnating around $8,000/day from January to March, jumped to $15,500/day by mid-April, then $23,000/day in August to break through $25,000/day today.>

With the majority built after 1985, generally with a double bottom if not a double hull, ships in this category benefited from the strong demand in the American and Far East markets, and also were sought after for movements of jet from the Middle East to Europe. Consequently not only was there higher tonnage transported than in 1999 but above all the routes were longer ; UK / USA (23 days round trip), Singapore / West Coast US (50 days round trip), Middle East Gulf / UK (42 days round trip).

This aspect of longer voyages came on top of the pressing demand for modern vessels in local markets: Singapore, Japan, Korea, Mediterranean, North Europe, Caribbean, and the US. The result of the heavy use of these ships on relatively long voyages produced a highly nervous "inter-zone" market and at times it was difficult to find available tonnage. Consequently the average daily returns on ships of this size went from $10,000/day to $25,000/day in less than a year.

ST. CLEMENS 47,131 dwt, blt 2000 by Onomichi - Owned by Maruta

Dedicated to inter-zone voyages, ships in this category have a similar profile to those in the medium range, namely a relatively modern fleet, and where the 'Erika' consequences were less apparent. On the other hand, they took full advantage of the Asian economic recovery and of the strong showing on the American market. In addition the diverse demand coming from various Japanese, Korean, or Indian charterers gave rise to owners creating "pools" (Torm Waterfront or AP Moller).

"LR2" vessels with a 95,000 to 120,000 cubic metres capacity were principally used on voyages out of the Middle East Gulf towards the Far East. Nonetheless at year's end, they also were employed on delivering gas oil lots of 80-85,000 mt to Europe and Brazil. They also had the knock-on benefits of the strong performance of the Aframax crude oil tankers.

"LR1" vessels (80,000 / 95,000 cubic metres capacity) were employed, as were the 40,000 / 45,000 dwt vessels, on voyages from the Middle East Gulf to Europe or the US, North West Europe to the US, or Far East to US West Coast.

The scarcity of ships forced charterers to cover in advance and to ask for wide discharge options, which made it hard to read the market and played into the hands of the supply "pools". The daily earnings of "LR1's" shot up from $15,000/day in January to reach $ 40,000/day in December.
 

The rosy prospects for 2001 should not hide a somewhant fragile market.

The fact that the supply of tonnage is limited over the next three years suggests that freight levels should remain firm.

While the average lifespan of product tankers traditionally has been 23 years, the effect of the 'Erika' will almost certainly reduce the use of vessels over 20 years, thereby making nearly a third of the existing fleet obsolete. At the same time, ships which are on order, break down as follows :

Already it is practically impossible to place an order for delivery before 2003. In such conditions owners of modern tonnage can remain optimistic provided that demand does not tail off.

Charterers after trying to resist for as long as possible the harsh hike in levels sought by owners, are now biting the bullet and committing to time-charter periods of more than a year, at daily rates of over $18,000 for ships of 45,000 dwt and approaching $16,000 for those of 35,000 dwt.

Notwithstanding, the strong increases in freight rates at the end of the year leave one to question whether a technical correction might not occur.

Rates have accelerated tremendously as from November 2000. Levels which were already high, went up an average 33 % in one month, making trading difficult.

Conditions have reached such a state that traders refuse to commit to business, especially as the wide range of discharge options on previous voyages and the risks of bad weather make for delayed loadings. In addition, the freight costs are eating too much into the already slim refinery margins. And on top, the new base rates in Worldscale have been increased by 18 % as from January 1st 2001.

Therefore there is a serious chance of a drop in January / February, and as the preceding rise has been so strong the correction could be equally harsh.

However without doubt the biggest concern is the view given by economists for 2001 which forecast a growth in the American GDP of 3.4 % as against 5.1 % for 2000. It is therefore likely that the strength of American demand will diminish and that the tonnage transported to US destination will decline in 2001. This is however a fundamental factor in the market, as the low gas oil inventories in the US and Europe have been one of the key elements in contributing to the high rates.

The most probable scenario is a drop in crude oil prices during the first half of 2001, followed by a drop in product prices starting in the spring, given that US gasoline stocks are already higher than this time last year.

It is highly unlikely that spot freight rates will be able to stay at the giddy levels reached at the end of 2000. Nonetheless one can expect the market to remain volatile and generally favourable to owners.
 

In the course of 2000, about 67 vessels have been sold with a deadweight ranging from 20,000 to 57,000 tonnes. Out of these, we found 42 Handysize units and 25 Medium Range ships. Seventeen sales applied to vessels built in the seventies, 24 were assembled in the eighties and 26 constructed from 1990 onwards. The latter category includes two very promptly deliverable resales and two refinancing deals.

It is obvious that the 'Erika' effect has been very much felt throughout the year. Some owners have been willing to get rid of their oldest units, whereas a number of buyers wanted to acquire modern units which were not easy to find.

The nice returns prevailing on the charter market explained that we did not observe a bigger number of modern units being disposed of. Indeed, it was not due to the lack of potential buyers, but to a buoyant tanker market which led owners to re-consider a sale when they can reap nice returns by trading the vessels themselves.

Hence, overjoyed operators of attractive modern units preferred to keep their ships as they were quite optimistic on future developments of the product tanker charter market.

Buyers really had to be persuasive and pay up to try to convince owners to sell.

This has been illustrated by the resale to US based buyers OMI of two 47,500 dwt product tankers under construction at Onomichi. Their prompt delivery position (October and November 2000) enabled their Far Eastern owners Pacific Carriers to obtain a firm price in the region of US$ 30.5 m each.

We can also underline the deal which has been struck by Bergen-based Norwegian owners Tom Steckmest on the six 1993 and 1994 Halla-built units, until then under the wing of Paul Slater's "First International". Buyers bought them by acquiring a majority of the shares in the owning company and at time of writing there were still some pending subjects to be declared.

More than ever before, there has been a substantial increase in values of modern units (less than 10 years of age) while older tankers obtained with difficulty some modest improvements throughout the year.

As a generality and depending on their sizes and specific features, values of modern second hand vessels enjoyed a 15 to 25 % increase in the course of last year.

STENA BARBADOS 6,330 dwt, blt 1991 by Argos - Sold in 2000 to Wisby Tankers of Sweden with t/c back to Concordia Maritime for serving Texaco in the Caribbean