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Freight Watch - May 15-July 13, 2012
Nazir Ahmed Moulvi, Senior Analyst, Dept of Research & Strategy, Multi Commodity Exchange of India Ltd, Mumbai and Niteen M Jain, Senior Analyst, Dept of Research & Strategy, Multi Commodity Exchange of India Ltd, Mumbai Daily freight rates of Very Large Crude Carriers (VLCCs) for route TD3 moved up in second half of May 2012 owing to delay in emptying of the vessels in China – the second largest consumer of oil in World, thus temporarily eating into the surplus vessel capacity. Later owing to slump in oil demand due to weak economic growth in China, Europe and US, the vessels available for charter piled up to highest in last nine months. As a result, the freight rates kept plunging with new lows right till mid-July.



Average VLCC charter rates in mid May to mid July 2012 (period under review) stood at USD 18,531 per day, compared with USD 13,783 per day during same period last year. In calendar year 2011, it was USD 13,689 per day. Notably, for a breakeven, a vessel needs to earn around USD 18,000 per day. While, VLCC charter rate was trading at USD 31,747 a day during mid-May, the subsequent trading sessions saw charter rates hitting period’s high of USD 37,145 a day, on May 21, 2012. Delay in offloading the tankers in China creating a temporary supply squeeze in an oversupplied tanker market was one of the major reasons for rise in charter rate.

VLCCs, which have shipping capacity of around 2 million-barrels of oil, had to wait as long as 10 days in mid may on Chinese ports to discharge oil, compared with two day’s wait in normal condition, according to trade sources. The overhang at Chinese ports was due to a record monthly average 23.5 million metric tonnes of crude oil import in the first quarter of 2012, according to Chinese customs data. The large scale import created a storage problem and resulted in delay in offloading the stocks. As a result, the tankers available for loading in the Persian Gulf hit a three-week low on steady demand for cargoes helping the uptrend in charter rates. Additionally falling bunker prices – fuel used by ships, pushed up the returns of the VLCCs.

Soon the tide turned and VLCC charter rates witnessed a free fall as tanker oversupply resurfaced amidst uncertain global economic outlook reducing the oil off-take by developed nations. By end of May, the available supply of tankers was more than the double of available cargoes, pushing down the freight rates.



Amidst the slowdown, the vessel oversupply situation became so grim that owners were decommissioning and selling their vessels for demolition earlier than their life cycle ends. While, an average age of crude oil carrier is around 25 years, VLCCs are now recycled at the age of around 20 years, a level not seen since 1995. To put in perspective, during the first half of the previous decade, the average age of demolished tankers was at 26 years.

Despite the selective demolition activity, the tanker fleet has been growing as the orders placed during boom years are getting delivered. According to trade sources, the VLCC tanker market added 12.5 million dead-weight-tonnes (DWT) in first five month of the year against the 5.6 million DWT which has left the fleet during the same time due to demolitions.

On June 12, 2012, daily hire rate on TD3 route took a plunge after a report by Clarkson Research Services Ltd., a unit of the world’s largest shipbroker stated that the VLCC fleet will expand by 6.9 per cent in 2012, compared with demand growth of around 1.3 per cent. During the same period, the available vessels were 23 per cent higher than the prevailing demand.

Later, the charter rates for VLCCs fell further in July due to drop in China’s crude oil imports. China grappling with slowing economic growth and near completion of its targeted second strategic reserve, scaled back on oil imports by almost 15 per cent to 21.72 million tonnes in June compared with a month ago.

Additionally, a record rise in US oil inventory also signalled to the market that the country too would slow the oil imports adding to the supply glut of the vessels. Also persisting economic turmoil in key European countries couldn’t help much the falling charter rates.

As a result, the average daily charter rates for TD3 route fell by 91.6 per cent and closed the two-month period (July 13) at USD 2,822 a day, the lowest rates in past two months. At these prices, the carriers were facing a daily loss of around USD 14,000 to 15,000.