Tanker industry enjoys huge profits
With the escalating prices of oil and a persistent shortage of tankers that have pushed up freight rates, the tanker industry in the region is foreseeing a sharp increase in its revenues this year, according to industry sources.
Shipping companies based in or operating on the Middle East routes are expecting average returns of more than 30 per cent more compared to last year's revenues following an upward trend in freight rates registered since the beginning of the year.
Increasing operational costs resulting from higher bunker charges will continue to eat into profit margins, but to a negligible extent.
"Freight rates on a number of routes have been increasing sharply since the beginning of this year, meaning good returns for ship owners. However, operational costs have also been increasing at almost similar rates," Mathieu Philippe, general manager for Barry Rogliano Salles (BRS) Middle East told Emirates Business. "There are no indications that the trend will change in the short run and if it happens, it will not go back to the levels that we were used to."
A large percentage of the increased bunker charges is being passed on to the ship charterers as owners attempt to minimise profit cutting.
Strong market returns are expected in the tanker, chemical carrier, container and the dry bulk sectors.
The rising freight rates are largely attributed to supply constraints in the very large crude carrier (VLCC) market where demand levels continue to grow faster than the supply rate.
The increasing restrictions by the International Maritime Organisation on the usage of single hulls have created an unprecedented demand for double hulls, which are currently short in supply. As a result of the restrictions, owners have resorted to converting their single hulls into bulk carriers, creating a further shortage of tankers.
Due to growing demand for VLCCs, freight rates on various routes from the Middle East have almost doubled from an average of $80,900 (Dh297,145) a day in January 2008 to $150,500 in June.
Bookings for VLCCs sailing from the Middle East to Asia account for 47 per cent of global carrier demand, while the Middle East-Asia route remains the world's busiest for supertankers.
The cost of shipping Middle East crude to Asia last week stood at 192.03 worldscale points and is expected to rise this week. At that rate owners of double-hulled VLCCs, can earn $152,429 a day on a 39-day round trip from Saudi Arabia to South Korea, based on a formula by RS Platou, an Oslo-based shipbroker, and Bloomberg marine fuel prices.
"The future is very bright for regional shipping companies. Increasing freight rates mean high returns. We have seen more operators choosing to move to this region to cash in on the returns," said Mark Thomas, a shipping consultant based in Kuwait.
According to Thomas, the shortage created by the phasing out of old oil tankers and single hull vessels would ensure high freight rates for at least five years.
Middle East-based companies have invested more than $30 billion in building new VLCCs in the past two years to cash in on the growing demand and most of the deliveries are expected by 2012.
Last year United Arab Shipping Company decided to diversify and enter a joint venture with local business people to open United Arab Chemical Carriers (UACC) with an initial investment of Dh5.1bn, a quarter of which was raised in a private placement. Last year, UACC placed orders worth Dh2.1bn for 10 chemical tankers to be delivered in 2012.
However there is no evidence that even with the new builds in existence, freight rates will go down.
"It is quite speculative to think that new builds in the market will solve the current shortage of tankers. This might be the case after many years, but in the short and medium term we see new builds replacing phased out tankers," Sharafuddin Sharaf, chairman of UAE Ship Owners' Association, told Emirates Business recently.
As demand for oil increases, world oil consumption is projected to reach 93.7 million barrels per day (bpd) in 2011 compared to 83.3 million bpd in 2005, exerting more pressure on VLCCs.
The International Energy Agency, having calculated a modest growth in world consumption of 1.5 per cent in 2007, predicts a rise of 2.4 per cent in 2008. According to the recent annual review of the France-based BRS, the shipping industry globally will remain volatile as it has always been, making it difficult to make accurate predictions about its future performance. With the equivalent of 25 per cent of the current global vessels joining the fleet between now and the end of 2009, the BRS report argues that it is unlikely that world demand for tankers will grow in the same proportion. However, world consumption is expected to rise dramatically, pushed by the relentless energy requirements countries such as China, India and Brazil.
The numbers
80,900: Freight rate in US dollars per day in January, which shot up to $150,500 in June
47%: Of the VLCCs carry crude from the Middle East to Asia