Tanker owners build for an uncertain future

by David Hughes

The new building list is quite spectacular; including three large cruise ships, one VLCC (very large crude carrier), one LNG carrier and two “super cape size”, 200,000 dwt bulk carriers. It is, incidentally, the first one for some time not to include any containerships though no doubt some were booked in the past couple of weeks and certainly there are still all the signs that the containership boom is still continuing and may even spread to feeder ships.
While the “boxship boom” has grabbed headlines, tanker owners have also been very active in the new building market. What sort of market faces those vessels when they come into service is however a moot question. About a fortnight ago, a report from UK-based Drewry Shipping Consultants had gloomy news for ship owners. Since then OPEC productions cuts have started to hit tanker freight rates.

The author of “Annual Tanker Market Review and Forecast 2003/04”, Saurabh Nakra, said: “The prognosis, unfortunately for owners, is that the best is behind us and the correction in the freight markets is here to stay. Global oil demand is expected to grow slowly as the economy struggles to find its feet again, the threat of terrorism continues to prevail and the tanker order book has once again started growing.”
Explaining the current tanker order book, Captain Nakra said that low new building prices and the then improving freight rates provided an ideal market situation which prompted owners to place orders for new tonnage and exercise their options. The increased regulatory pressure on single-hull tankers had also acted as a catalyst pushing up the new building orders.

The tanker order book, though still representing some 25 % of the current fleet, had been on a downward trend towards the end of last year. The 2003 boom turned that around and took the total tonnage on order past the 80 mm dwt mark, representing well over 28 % of the existing fleet. But Captain Nakra did say: “The silver lining exists in the shape of increased pressure to accelerate single-hull tanker scrapping with the EU having passed its set of stringent requirements. It now remains to be seen whether other countries and the IMO will follow suit with either country-specific or industry-wide single-hull bans.”
Nevertheless the report's overall tone is downbeat and it warns that the current tanker order book is in excess of 28 % of the fleet. Drewry said that the peaks in freight rates seen earlier this year were unsustainable. That seems to be borne out already by events. The report did, however, expect the tanker market to retain its underlying strength well into 2004. Whether the confidence of tanker owners will be sufficient to keep the ordering spree going could be another matter.

Norwegian shipping entrepreneur John Fredriksen, who controls tanker owner Frontline, has been clear enough in his belief in the long-term strength of the tanker market. But Mr Fredriksen is also very active in the specialist, and very expensive LNG shipping sector through control of LNG carrier specialist Golar LNG. That company has just signed a new building contract with the South Korean shipbuilder Daewoo for one 145,000 cm vessel “for delivery in end of 2005/alternatively beginning of 2006”. The deal includes an option for up to two more new buildings with delivery in 2006/2007, “to be declared at a later stage”.
Mr Fredriksen said: “The strong market recovery in the dry bulk, container and tanker sectors has put pressure on yard capacity. In this situation it has been important for Golar to secure the future growth of our company. The combination of the attractive contract price, fixed earlier this year, and the additional option package makes this deal a very favourable contract for Golar. It is Golar's intention to work with employment opportunities where the strategic value of Golar's four uncommitted new buildings can be maximised as a package.”

“Such deals can include time critical infrastructure projects like the Italian Livorno project or other LNG chain projects managed by major LNG receivers/producers. Until such projects can be realised the board is prepared to trade the vessels in the spot/short-term market. The spot market presently represents in excess of 10 % of all trades in the LNG market and is expected to grow significantly.”
That certainly shows Mr Fredriksen's commitment to the future of the LNG trades. The latest order means that Golar has five ships on order in South Korea, three at Daewoo and two at Hyundai Heavy Industries.