VLCC sector earnings continue to languish as recent rate movements broke through previously estimated seasonal support levels. TD1 spot rates have fallen into the teens, while other Baltic VLCC routes have also dropped precipitously in the new year. Furthermore, time charter rates are well below our assessment of the vessel’s breakeven level of approximately $28,700, despite the fact that newbuild prices have fallen to $90MM.
There have been a few notable orders of VLCCs thusfar in 2013, and in a move that we did not previously foresee materializing this soon, the VLCC orderbook has begun to rebound, reaching 83 vessels or approximately 13.5% of the total fleet size.
Still, the question remains: why do large-scale orders continue in the face of persistently dismal earnings? The desire to “buy low” and be prepared for a scenario in which rates recover is enabled via continued credit extension by export-import lending entities controlled by governments that may view shipbuilding demand through the lens of domestic employment. For example, a representative of the Export-Import Bank of China was quoted by Reuters as saying, “no matter if the market is good or bad, as a policy bank we will continue our efforts in providing more support for the (Chinese) shipping sector” when explaining why the bank anticipates increasing lending by as much as 20% in 2013.
It is necessary for owners to be extremely disciplined in order for the hangover of the last decade’s vessel procurement to subside and for the supply/demand dynamic to reach levels that support more robust earnings. While the pace of deliveries slowed in 2012, the current orderbook suggests that deliveries should pickup again in 2013. Given modest ton-mile demand growth projections, the demand side of the equation would not provide the impetus for major rate growth. In turn, we do not forecast fleet utilizations reaching aforementioned levels in the near term unless consensus macroeconomic growth and crude oil consumption forecasts are well below the mark.
These forecast utilization levels and associated time charter rates would likewise be negative for earnings in the spot market as the two are closely correlated.
The age of the fleet, coupled with relatively low newbuilding prices, has no doubt given way to replacement activity as owners try to lower the age profile of their fleet in a down market. Other owners, drawing on their experience of the boom years that have followed previous busts, view the current earnings environment as an opportunity to be well-positioned for the next cycle by having a larger fleet in a higher margin environment. This has the potential to become self-defeating, preventing a recovery in utilization levels. Owners should be wary of speculative purchases, which could hinder this possibility for an even modest rate recovery.
