A single day voyage of a very large crude carrier (VLCC) requires a minimum operating cost of between $8,000 and $9,000 — without adding interest or proportionate cost of vessel. But a rough assimilation of spot rates on various routes would suggest that the average rate was just about $500 a day for the July to September quarter.
True, the rate does not represent a particular fixture for a particular voyage as it is a rough assimilation of market fixtures reported by various brokers, but it does mirror the depths to which daily hire charges for a VLCC had plunged in the last quarter.
Across other asset classes, including Aframaxes and bulk carriers, the fall may not have been as accentuated, but the bottom-line was that shipping industry had to steer through choppy waters last quarter. Although the rates, especially in the tanker segment, gathered some steam in the current quarter, but ship owners will have to weather more stormy days in the coming months.
Taking the plunge
Deepening economic woes across the globe have crimped demand for movement of cargoes. To make matters worse, addition of new ships in the market is exerting a tighter squeeze on the margins of ship owners.
“I think rates will remain dull at least till mid-2013, given the new ships that are scheduled for delivery. Hopefully, by then the global economic conditions could also see some brightening,” A.R. Ramakrishnan, Managing Director of Essar Shipping, says.
Indeed, tankers smarted under a sharp drop in demand, especially with lower Middle East crude exports, slackening US imports and shutdown of a major refinery in Venezuela.
Going by the rough assimilation of various VLCC fixtures, the average rate tumbled from $13,605 a day in the first quarter of the fiscal to $835, $776 and $1,296 in the next three months. Similarly, for a Suezmax, it dropped from an average of $10,193 a day during April to June, to $7,604, $2,485 and $1,722 in the next three months.
Ship owners who deployed tankers on long-term charter drew some cold comfort with relatively better yields than those in the spot market.
For instance, Great Eastern Shipping saw a six per cent year-on-year (YoY) increase in its Time Charter Yields (TCY) in crude carriers to $18,331 per day during the quarter due to its long-term charters. But in the product carriers segment, it saw a 22 per cent decline — from $16,323 in the second quarter of last fiscal to $12,804 this year.
“Couple of our product tankers, which were fixed in 2008 at higher rates, came off the long-term charters. These are now operating at prevailing rates that are lower than the earlier rates,” G. Shivakumar, Chief Financial Officer, said last month.
Demand-supply mismatch
Freight rates across all segments in the dry bulk sector were also stifled by a subdued commodity demand in the wake of frail global sentiments and new fleet growth. The Baltic Dry Index (BDI) moved from an average of 1020 in the first quarter to 1057 in July, 761 in August and 707 in September. Great Eastern’s TCY, for instance, dropped 18 per cent in this segment YoY — from $14,223 to $11,708 a day during the last quarter.
“The freight levels are low in almost all segments, as a result of the demand-supply mismatch of shipping capacity. The situation is not likely to get corrected within a short span and may take at least a year for the freight market to look up,” admits B.K. Mandal, Director (Finance) of Shipping Corporation of India.
SCI, India’s flagship company in this sector, reported a lower income of Rs 1,026 crore during the quarter, down 11 per cent from the preceding quarter.
An uptick in tanker rates in the beginning of this quarter brought about some warmth among vessel owners, although it is a given thing that oil transportation increases during the winter. VLCC rates sneaked up from an average of $842 a day in October to $11,832 in November, crossing even $16,000 in the last week.
The International Energy Association expects global oil demand to grow by just about 0.8 million barrels/day (0.9 per cent) in 2013. Analysts expect the demand growth in the tanker segment to hover below one million barrels per day, which is considered as a weak demand.
On the dry bulk side too, ship owners saw rates gaining some traction, with the BDI inching up from 952 in October to 1,097 in November, primarily on account of Chinese iron ore imports picking up.
Global effect
China, which is expanding its aluminium capacity, could import a total of 37 million tonnes of bauxite and 251 million tonnes of coal due to a slowdown in its internal coal production in 2012, Clarkson Research Services said in a report last month. Similarly, the development of a new method of stainless steel products boosted its nickel ore imports.
Nonetheless, the dry bulk graph quickly dived this month back to 800 levels, as soaring raw material inventories, droughts in certain parts of US and Russia and fleet growth put back pressure on earnings.
“Even though scrapping has witnessed significant improvement, the prospect of any meaningful rise in freight rates in the next 12 months looks unlikely because of massive fleet growth. Scrapping number has hit the 28 million dwt mark, exceeding 2011 numbers. But looking at the estimated additions in the next two years, the scrapping number does not look high enough,” Great Eastern says in its market outlook.
Spiralling fuel costs, which account for nearly 40 per cent of the operating revenue, are also adding to the woes of shipping companies.