How are Tankers Valued?

Reprinted from the June issue of Marine Log
JUNE 17, 2016 — In this article we explain how VesselsValue produces tankers valuations, and look at some interesting recent sales. Who were the top sellers of tankers this year? By Craig Jallal, Senior Data Editor, VesselsValue (Extended Coverage from Marine Log’s June 2016 issue).
The birth of VesselsValue was driven by timing and need. In 2008, the crisis in the financial market extended into shipping. The dry bulk sector and the containership sector were hit the hardest, and while tankers remained relatively buoyant, banks needed to assess their capital commitments against the value of the assets being financed and being used as collateral. However, in the depth of the crisis (2010 / 2011), ship brokers were telling clients they could not value the ships as there had been no recent sale or “last done” in ship broker speak. Richard Rivlin, a sale and purchase broker with 30 years’ experience, had long felt that an automatic valuation system could be built, which would produce valuations in any market, at any time. Luckily, his brother is a Professor of Mathematics, and together they designed and built such a system. It quickly became apparent that the highly detailed multi-level regression model was far too complex for normal spreadsheets, and a specialist modelling company was employed to develop the model.

The model is fed by two databases. One contains the features and specification of the ships arranged in a unique structure that allows the computational model high speed access. This database is researched and compiled by VesselsValue own team of 30 researchers and analysts on the Isle of Wight in the UK. The second database consists of sale and purchase transactions and charters. Both feed the mathematic model which is operated by a team of quantitative analysts. The aim was to produce an instant, accurate and always available online ship valuations for the banks and finance houses, that form the main customers of VesselsValue.

Tankers Valuation
According to VesselsValue, five factors make up a valuation:

Type (VLCC, Suexmax and so on)
Features (shipyard, hull, and so on)
Cargo Capacity
Freight Earnings
Each factor is broken down into further elements that are scored. As an asset, tankers are relatively straightforward, being highly commoditized, and standardized in terms of size ranges and specification. In part this is due to the international safety and pollution control legislation that has been forced on the tanker sector. This level of standardization makes VesselsValue task somewhat easier when it comes to scoring the factors, than offshore vessels, which have just been added to the system. In the case of tankers, there are around 140 scores. One of the most important scores is the shipyard. A vessel built in China is less desirable than one built in Japan. A well-published example is the one shown above. In November 2014, the New Century-built Supramax bulker ACS Diamond was sold for $10 million. The previous week, the slightly older Japanese-built pair of Supramaxes were sold for $15.5 million each. This was an implied discount of around 40% between Japan and China. However, the shipyard scoring goes into several levels of sophistication, including many ships the shipyard has built and when the last vessel was constructed.

This model is continually updated and recalibrated overnight to give the closest possible fit to the reported sales prices. It is the analysis of the sales that can produce the weightings required for different shipyards. These are applied to all shipyards, not just Chinese shipyards.

So far VesselsValue have performed over 1,000,000 valuations to date, about 400,000 a year and the number is increasing.

How Accurate is VesselsValue?
The split of VV customers are banks and finance houses, owners and other maritime industries such as lawyers, insurers and charterers – sophisticated market participants who insist on knowing the methodology behind our valuations. But ultimately they want to know how accurate are our valuations because this will affect their bottom line. Valuation accuracy is assessed as the difference between the price a vessel is sold at, and VV valuation on the day before the actual sales date. This is expressed as a % of valuations within a certain band of accuracy and shown in a chart form. The accuracy report is available on the website.

Tanker Valuations Development
According to the VesselsValue transactions database, between the start of 2012 and May 2016, a total value of $143 billion of tankers have been traded on the sale and purchase market. During that period the value of second-hand tankers has steadily increased, as can be seen from figure 1 (“VV Tanker Matrix”) below of the VV Tanker Matrix, expressed as USD / DWT.

During that period, the MR tanker has been the most frequently traded tanker type, both in terms of number of sales, and value (see figure 2 “Total Value by Type of Tankers Sold 2012 to Date”).

So far in 2016 (to 15 May 2016) 83 tankers with a total value of $1.4 billion, have been traded on the second-hand market, and again the MR tanker is the most popular (see figure 3 “Value of Tankers Sales Jan 2016 to YTD).

Interestingly, the average age of MR2 (Chemical / Product) tankers sold in the first five and half months of 2016 is only three years-old. Altogether 17 of these vessels were sold in this period, with eight tankers being sold by owners in the USA (these were not Jones Act vessels).

The majority of tankers and the largest value of tankers sold so far this year (2016) were constructed in South Korea, followed by Japan and China. As far as owners are concerned, the lead seller across all types of tankers was Chembulk Tankers, Scorpio Tankers and companies associated with the Navig8 group (see figure 4 “Top Ten Sellers of Tankers Ranked by Number of Vessels Sold”).

Recent Sales of Interest
The top three sellers have sold tankers for completely different reasons and strategy. In January 2016, Chembulk Tankers was sold by parent company Berlian Laju Tanker (BLT) to private equity investor Kohlberg Kravis Roberts (KKR). Chembulk Tankers is said to have a number of Contracts of Affreightments (CoAs) and the older tankers were surplus to requirement. This is part of the KKR growth strategy to rebuild the Chembulk Tankers fleet. KKR has also invested in a fund to invest in two Greek bank shipping portfolios.

The number two top seller, Scorpio Tankers, was a tactical, opportunistic sale. The purchaser, Bahri (formerly known as National Chemical Carriers of Saudi Arabia) is on something of a buying spree. Bahri has recently purchased two VLCCs from Tanker Investments in December 2015, for a reported $77.5 million. The five 2014-built MR2 tankers were sold en bloc for $167 million are trading in the UAE under Bahri CoAs.

The third most active seller, Navig8 Chemical Tankers, Inc., sold the four resales (the MR2 tankers are due for delivery in 2017) under a ten-year bareboat charter (with purchase option) for a reported $35 million each. This was an internal sale within the group, and part of a longer term strategy.


Posidonia: Lloyd’s List Briefing – Current State of Shipping

Sunday 5 June 2016.

The Lloyd’s List Briefing is now a traditional sharpener for Posidonia week. The event was presented by Richard Meade, the Editor of Lloyd’s List, assisted by head of the Greek desk, Nigel Lowry.

Christopher Palsen, the head of Lloyd’s List Intelligence research kicked off the event by setting the scene and offering his explanation of where shipping was, and why.

He posited that the dry bulk fleet now consisted of 11,149 ships, with a capacity of 784m dwt. With a substantial portion of the bulker fleet idle (average age 18.5 years), why had there been any ordering at all in this sector since 2008? The answer, in his opinion, was Chinese interests. Specifically, the five-year plan for 50% of imports into China to be carried by Chinese-owned ships. The result was a massive shipbuilding programme. This has flooded the market, but it has kept Chinese shipyards busy, and the cost of transport low. He also made the point that Chinese coastal (non-deep sea) shipping carries an estimated 2.5bn tonnes (of which 1bn tonnes is coal) on coastal ships. He admitted LLI had very little information on this fleet, except that it was very old, and was being replaced by modern deep-sea ships.

According to LLI, the global tanker fleet consist of 2,003 ships (this is too small for the whole fleet and is probably only the largest sectors – CJ) with a capacity of 367m dwt, of which 29m dwt was being used for storage. The orderbook stands at 64m dwt. He asked if there would be enough demand for all this tonnage?

According to LLI, there are 5,292 container ships, with a capacity of 19.8m TEU, with another 3.9m TEU on order. The key with this fleet is efficiency. He felt that there was significant growth potential in converting Chinese general cargo and break bulk cargoes into containised shipping.

On the economic demand side, Mr Palsen felt that the slower growth in China ( about half the past averages), was still robust. In his opinion, the drivers in the future will be India and other Asian countries.

On the energy side, according to Mr Palsen, around 85% of energy demand is supplied from hydrocarbons, and even if renewables grow fast as 15% pa, after a decade of growth, this would mean hydrocarbons still accounted for 75% of energy supply. He noted that shale gas production has resulted in the decoupling of the gas price and oil prices in US. It would appear that Saudi Arabia (by flooding the crude oil market) was winning the battle to kill off some smaller US opertors. But if the oil price rose again, would these fields come back onto the market?

A Recent Article for a French Newspaper

JMM Les VLCC de NITC ont ete actifs pendant la periode des sanctions

Happy Birthday OPA ’90

Final Provisions of OPA ’90 Come into Force at the end of 2014 (

I am grateful to Bob Beegle of barge and ship brokers Marcon International Inc, USA, for allowing me to re-print in full the following article from their Winter 2014 newsletter. In it, Bob examines the impact of OPA ’90 on the domestic US fleet, and is a useful reminder of the long tail there is to one of the most important pieces of regulation in modern shipping.

Link to the PDF version of the newsletter.

Happy Birthday OPA’90

By Bob Beegle 

It has been 23 years since the Oil Pollution Act of 1990 became law. The sunset date is December 31, 2014, at which time all single hull tank vessels and barges in the United States will be phased out of petroleum service. The law was mainly a result of the massive oil spill in Prince William Sound, Alaska on March 14, 1989 when the “Exxon Valdez” struck Bligh Reef. At 257,000bbl, it was one of the largest oil spills in U.S. history in terms of volume release – at least until “Deepwater Horizon”. The rising public outcry to regulate the waterborne petroleum trade to better protect the environment created the impetus for the U.S. Congress and the President to pass the Oil Pollution Act of 1990 increasing the liability for spills and requiring the use of double-hull tank vessels and barges operating under U.S. Registry in addition to other provisions. OPA-90 allowed for a gradual 25 year implementation period for U.S. Owners to comply with the federal law which would require the phasing out of all single hull barges and vessels engaged in petroleum transport by December 31, 2014. With this law’s passing there were obvious cost increases to rebuild the U.S. fleet with double-hull tonnage. Some allowances were made for existing double hull vessels and barges to continue trading, as double hulls were already being used in many areas and for specific cargoes. However, in many instances existing units did not technically comply with the void space measurement requirements (i.e. beam ÷ 15 = double hull void space) and they also faced restrictions on trade and/or future phase-out dates. There was a lot of grumbling in the industry when the law was first formulated, but it is now solidly in place and the market has adjusted accordingly over the past 23 years.

The costs to the overall industry to absorb these new regulations into their US operations obviously increased the cost of doing business for those who made their living transporting petroleum products on the water. Calculations based on the additional costs to construct double-hull tonnage pushed hard up against the earnings and charter rates which were standard in the market at the time. Many major operators at the time the law was passed had already invested large sums of money into upgrading their single skin tank vessel and barge fleets. The case of Maritrans, Inc. and their subsidiary, Maritrans Operating Partners L.P., was the most notable example of a U.S. tug and barge company which went on record at the time to protect their large capital investments in 37 large, single hull, ocean tank barges – which was one of the largest domestic fleets of U.S. flag oceangoing petroleum barges operating along the Gulf and Atlantic Coasts. Maritrans filed a suit against the U.S. Government for a ruling that it was engaged in “illegal takings” with passage of Section 4115 of OPA-90 being a violation of a U.S. citizen’s rights under the Fifth Amendment to the U.S. Constitution. The amendment specifically prohibits the U.S. Government from taking private property for public use without just compensation. The case was eventually dismissed by a ruling in December 2002 by a U.S. Court of Federal Claims. In the US $1 billion lawsuit the Court ruled Maritrans’ claim invalid that the double-hull requirement in the Oil Pollution Act of 1990 was equivalent to an unlawful taking. With that legal argument over in the United States, owners and operators, as well as the oil majors who chartered the tonnage, had to figure out how this was all going to work out and affect their bottom lines. This was a lot more involved than just figuring the costs of building a new double hull tank vessel into the daily charter rates. Existing charter rates at the time would not necessarily compensate Owners for the constantly increasing newbuilding costs. Some early owner/operators of double hull tonnage were initially forced to charter out their new double hull assets at a loss in order to secure a long term position in the market. Other consequences that came into play with enactment of OPA-90 included the need for higher horsepower tugs to handle the larger size, but sometimes same or lower capacity barges; higher insurance premiums as insurers themselves started to realize their potential liabilities in event of a spill; and plummeting book values for single hull tonnage which was especially worrying to publically traded companies. It was a rough time as owners and operators endeavored to get a handle on the changing playing field.

Luckily for many involved in the trade, the average WTI spot price for crude oil, at $14.42 in 1998, started climbing. By 2000, the average WTI spot price had more than doubled to an average of $30.38 and some pundits forecasted that we would eventually see $100/bbl, $200/bbl and maybe even $300/bbl as we approached a theoretical day of “peak oil” production. After a slight slump in 2001 and 2002 the price for crude was back to over $30/bbl in 2003 and eventually peaked at an average of $99.67 in 2008 before falling over $38/bbl due to the Great Recession. During the 10-year run-up in the price of crude, oil  companies’ earnings increased and the higher costs to charter in new double  hull tonnage could more easily be absorbed. Single hull barges were also departing the market and being sold overseas, scrapped or otherwise removed from oil trade at an increasing pace. Between 1990 and 2013 alone, Marcon International, Inc. sold 138 inland and ocean tank barges with an aggregate capacity of over 7.485 million barrels capacity (approx. 1,000,000dwt) with most being non-OPA-90-compliant units.

Higher crude oil prices resulting in a higher value cargo and declining competition from single hull barges finally created a tipping point which allowed U.S. Owners to better recoup their investments in new double hull tonnage. The double-hulling of coastal tank vessel fleets accelerated after 2007 as single-hull vessels built during the 1978-1983 boom period reached OPA-90 phase-out dates. During 2007-2011, 58 tank vessels were removed from service while 73 new/rebuilt double-hull tank vessels entered service. As of year-end 2011 – three years before the final cut-off date, the double-hulling of the coastal tank vessel fleets was nearly complete. While most of the U.S. flag single hull ocean and some inland barges departing the domestic market prior to 2011 were sold foreign, that market is also rapidly changing. Overseas, IMO II double hull requirements were generally adopted in 2003, although initially with only 14 countries and the European Union signing on. Most countries in the world now mandate double hull requirements for new tonnage trading on international voyages, being built or imported in the country and many are also placing age restrictions on imported barges, whether double hull or not. There are very few areas of the world now where single hull  petroleum barges can trade and these markets for the older oil barges are rapidly diminishing.

The increased costs of OPA ’90 requirements and the high liability exposure in the case of an oil spill has also pushed the industry into a consolidation mode to spread the costs and reduce overall liability costs under the new law. The liability for tank vessels larger than 3,000 gross tons was increased to $1,200 per gross ton or $10 million, whichever is greater. Responsible parties at onshore facilities and deepwater ports are liable for up to $350 million per spill; holders of leases or permits for offshore facilities, except deepwater ports, are liable for up to $75 million per spill, plus removal costs. The Federal government has the authority to adjust, by regulation, the $350 million liability limit established for onshore facilities. Offshore facilities are required to maintain evidence of financial responsibility of $150 million and vessels and deepwater ports must provide evidence of financial responsibility up to the maximum applicable liability amount. Claims for removal costs and damages may be asserted directly against the guarantor providing evidence of financial responsibility. The fine for failing to notify the appropriate Federal agency of a discharge was increased from a maximum of $10,000 to a maximum of $250,000 for an individual or $500,000 for an organization. The maximum prison term was also increased from one year to five years. The penalties for violations have a maximum of $250,000 and 15 years in prison. Civil penalties are authorized at $25,000 for each day of violation or $1,000 per barrel of oil discharged. Failure to comply with a Federal removal order can result in civil penalties of up to $25,000 for each day of violation.

Exxon was originally ordered by a federal court to pay $5 billion in punitive damages in 1994. A federal appeal in 2006 reduced that award to $2.5 billion, and in 2008 the United States Supreme Court further reduced the damages to just over $500 million. However, more than $2 billion had been spent on cleanup and recovery during that time, and to date Exxon has paid at least $1 billion in damages. These fines and penalties, coupled with the pervasive negative publicity, have become just too much for many individual companies to absorb. It now made more sense for some of the largest oil companies in the world to hire in its towing and shipping operations versus exposing themselves to greater liability risk and negative publicity in order to ship their oil. Exxon exited the U.S. domestic market as far as shipping petroleum in January 2003 when Kirby Corp. acquired SeaRiver Maritime’s fleet of 48 double hull inland tank barges and seven inland towboats, the privately held U.S. transportation arm of Exxon Mobil Corporation which was formed in the early 90s following the “Exxon Valdez” oil spill. Spentonbush/Red Star Group, affiliates of Amerada Hess Corporation also divested itself of nine ocean-going tugs and ocean-going tank barges and their related coastwise transportation businesses in early 2001 when Hornbeck acquired these assets and entered into a long-term contract of affreightment with Amerada Hess as its exclusive marine logistics provider and coastwise transporter of petroleum products in the northeastern United States.

Coupled with the Clean Air Act Amendments of 1990, the impact of environmental compliance costs in the U.S., in regards to refining, resulted in increased capital costs on a broad front. Resulting from this we saw a massive wave of joint ventures, mergers and restructuring in the oil business during the 1990s and the “super majors” were born. In 1990 there were 19 major U.S. energy companies. By the year 2000 there were 10. Chevron and Texaco merged in 2001 and Exxon’s merger with Mobil in 1998 created the world’s largest publicly traded energy company. With individual state laws also coming on the books, usually after another spill (i.e. Buzzard’s Bay in April 2003), covering specifically sensitive areas with often a higher exposure than Federal Law, this was an unpredictable landscape indeed.

Many small to mid-size companies quickly got out of the oil towing business altogether over the next several years as they were unable or unwilling to comply with the “deep pocket” requirements in order to continuing operating under the new regulatory regime. In 1983, there were 23 principal operators in the United States hauling petroleum products by barges over 3,000dwt – Sonat Marine (472,579dwt), Crowley (313,140dwt), Amerada Hess (309,400), Bouchard Transportation (158,473), Coastal States (110.789), Moran (96,824), Cirillo Bros. (90,814), Hvide Seabulk (90,360), Amoco Oil (87,597), Texaco (86,527), Ingram (56,249), Bulkfleet Marine, Penn – Morania (67,252), Hannah Marine (60,097), LeeVac (55,995), Charter Oil – Nepco (53,620), Exxon (52,952), Pittston Marine (51,235), McAllister Bros. (50,835), Allied Towing (49,218), Berger (48,000), Sun Transport (44,233), and Marathon (40,000) – with an aggregate total of 212 or 84% of the 285 U.S. fleet of petroleum barges over 3,000dwt. How many of those companies do you recognize today as still being actively transporting petroleum cargoes?

Newbuildings costs for vessels and barges in the U.S. are another major factor in the increased cost of transporting petroleum. Suddenly there was a demand for double hull barges and tank vessels to replace all of the single skin tonnage – and it had to happen in a maximum period of 25 years by either retrofitting existing single hull vessels and barges or building new. Neither option was cheap. In 1990, Marcon International estimated that a 60,000bbl ocean double hull tank barge, depending on coatings, heat, bells & whistles, etc., would cost about US $90-100/bbl to build. That same barge to build new ten years later in 2000 was still running close to about that same level. During this period annual inflation levels were running at an average of about 3.35% (1990-2000) based on the Consumer Price Index as reported by the Bureau of Labor Statistics. Costs to build a new double hull tank barge were relatively flat, but we were still fifteen years away from the final date for OPA-90’s phase out of non-compliant barges. The next decade, however, was not so kind with respect to newbuilding prices. Between 2000 and 2010 the newbuilding cost for a double hull ocean tank barge effectively doubled – and then some.  The Cost to build a new double hull ocean tank barge of abt. 60,000bbl today is about US $225-250/bbl. Inflation rates (as per the C.P.I. calculated via B.L.S.) for the 10 year period from 2000-2010 averaged 2.72% – so obviously this calculation of inflation has little to do with the actual increase in the cost to build new barges.

Now twenty-four years after OPA-90 hit the books, almost all single skin tank vessels and barges have been phased out of the U.S. market, despite it still being legal for a few remaining single skin barges to trade up until Dec 31, 2014. The oil majors have basically purged their refineries and dockside facilities of single skin tank barges and vessels as a result of the liability exposure, perceived operating safety records and the rising number of available double hull barges in the market. This rising number of barges trading does not necessarily mean that there is a rising number of double hull barges in the S&P market. With the highest utilization rates in memory, continued expansion of the U.S. production of oil and gas to levels not experienced since the 1970s, good times are here again for many U.S. owners, operators and shipyards. According to a report released by the Energy Information Administration Summer 2013 – barge shipments of crude oil from  the Mid-West shale production of crude oil in Canada, the Dakotas and Pennsylvania which need to get to the US Gulf refineries for refining and export, reportedly increased almost 80% from the same time in 2012. In the North Dakota region, oil output could hit 1 million bbl/day by the end of 2013. The state’s Mineral Resources Department reported in Fall 2013 that in May the production hit 850,000bbl/day and in August that level surpassed 900,000bbl/day.

As a result of these production increases, US waterborne transport has continued to grow and the traditional systems of moving both crude oil and potentially millions of gallons of shale gas wastewater cargoes in the future to disposal sites will test the limits of all available sources of transport including pipeline, truck and rail. Under U.S. law, vessel operators must report domestic waterborne commercial movements to the U.S. Army Corps of Engineers. 18.8  million tons of petroleum and chemicals were carried in November, down 17.5% from October’s 22.8 million short tons, but still above the 2013 average  to-date and the highest tonnage carried for the month since November 2003 when 20.2 million tons of petroleum and chemicals were carried. Potential future Federal safety requirements for rail cars transporting crude oil and ethanol are to include an outer steel jacket around the tank car (i.e. “double-hull”), thermal protection, full-height head shields and high-flow capacity relief valves. These changes could see 78,000 out of 92,000 existing tank cars currently moving flammable liquids out of service for retrofitting or phase out and another 14,000 newer tank cars requiring certain retrofit modifications and enhancements.

With expectations that U.S. oil production will not peak until 2020, there continues to be growth projected in the tank barge market over the next several years. Since 2006, US tight oil production has risen from roughly 300,000bbl/day to just under 2 million bbl/day. The EIA announced in December 2013 that shale oil output is expected to hit a high point of 4.8 million bbl/day by 2021. Production in 2013 will reportedly rise to 3.5 million bbl/day, which is an increase of 1.2 million bbl/day over 2012, and this production is expected to surpass the 4 million bbl/day level in 2014. Peak production from tight oil sources (i.e. shale deposits) is expected not to peak until 2020, with estimates as high as 8 million bbl/day, at which time the US will likely see another decline in overall production as the horizontal drilling / fracking boom is expected to begin to diminish. A sure sign of the increased demand in the waterborne trade was the announcement in late November that Jeffboat was hiring 100 additional workers between now and March 2014 to ramp up their barge newbuilding business and to open a new production line in order to meet this continued demand for newbuild tonnage. Earlier this year  we reported that Jeffboat was not taking any newbuilding orders for inland hopper barges, traditionally the shipyard’s historical main stay of production, as it was re-tooling its shipyard production to focus strictly on the tank barge business.

All of this activity has pushed any good available tonnage in the second-hand market towards the price levels of newbuilding – if anything at all can be developed. There are very few, double-hull tank barges available in the market for sale in the US, except under situations where unsolicited offers may be submitted directly to the Owners of this tonnage, and in most instances those Owners would only be interested in seeing that tonnage sell out of the US Registry to foreign Buyers. Colombia and Mexico have been expanding their production of crude oil as well, and their demand for tonnage both for storage and transport has been growing. Typically the costs required to buy tonnage in the US and export to those regions may be found to be cost prohibitive, so there is also demand rising in South America for newbuildings at local or nearby shipyards. Owners in the US today are generally able to sit back and entertain offers from parties without quoting formal prices for sale even though the tonnage may be out of service and in lay-up at the time of the sale. Some older double-hull units have been rebuilt and are continuing to trade in the US even when one might have thought that their age would restrict them from service for oil majors. However, with demand for shipments running so high, these assets are finding continued service in the market, and make them “near and dear” to Owners if a Buyer wishes to pursue them on an outright cash basis.

Copyright © 2014, Marcon International, Inc. All rights reserved.

Impact of More Chinese-Owned VLCCs

The Chinese-owned VLCC fleet has reached 59 vessels, making it the third largest VLCC fleet after Japan and Greece. There are reports / rumours that Chinese owners are looking to order up to 40 VLCCs (one report was 80 VLCCs!) at Chinese yards. I thought I would look at the possible impact on VLCC fixtures, as presumably one of the aims of ordering up a large fleet is to reduce dependence on foreign owners. So far this year Clarksons has recorded 472 VLCC fixtures in 2012 with a discharge port in China. The first thing that is noticeable is the dominance of Chinese charterers. Only 21 472 (to mid-October 2012) were recorded as having a non-Chinese oil company or trader as the charterer.

The second interesting fact is the regular appearance in the fixture list of Chinese-owned VLCCs. Of the 472 China discharge fixtures, 188 (40%) are Chinese-owned VLCCs fixed to other Chinese oil companies and traders.

But not all Chinese-owned VLCCs have been captured or reported in the fixtures. Around ten VLCCs do not make an appearance, presumably because they are on work that does not allow them to dip into the spot market. By my estimation the 188 fixtures above have been serviced by 45 Chinese-owned VLCCs. If another 40 VLCCs are added to the Chinese fleet a simple extrapolation suggests that this would have covered 80% of the current level of China-bound VLCC fixtures (assuming demand stays the same).

The losers would be the independent cross-trading VLCC owners, who have no cargo to trade and whose ships mainly work the spot market.

The vast majority of the fixtures (80%) are AG – China, and Chinese VLCCs account for 52% of these. Therefore, an expanded Chinese VLCC fleet would dig deep into this trade. Non-Chinese VLCCs have been pioneering the West Africa – China trade, where there have been 88 non-Chinese VLCC fixtures, compared to 8 Chinese-owned. China is cementing relationships in this region, and some of this trade could also be absorbed by new Chinese-owned VLCCs.

So where can the independent cross-trading VLCC owners expect to do business with the Chinese once the fleet is expanded? In 2012 there were fixtures for loaded VLCC voyages to China from the Yemen, Caribbean, Brazil, Turkey, Iraq and Iran (last reported fixture in May). These trades are likely to be left to non-Chinese VLCCs, but this will not sustain the previous level of VLCC spot activity.

Several of the independent cross-trading VLCC owners that fixed ships to China so far this year have VLCCs on order. The expansion of crude oil imports to China is a good story and one that is often used to justify ordering newbuildings. But a 40-ship order of Chinese-owned VLCCs will quickly sweep away the main market, leaving the independents on the margins of the Chinese VLCC trade.

Copyright Craig Jallal. All Rights Reserved.

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