Tankers facing heavy losses

New York-based marine transport consultancy McQuilling Services has undertaken a sobering cost-structure analysis on a five-year tanker acquisition project, revealing all classes would produce negative cash flows based on its average rates projections from 2010-2014.
“This result is an indication of how unattractive tanker shipping is currently as an ongoing business,” McQuilling’s Tanker Market Outlook, in which the data was presented, said.
“Given the poor cashflow position of tanker projects presently, it would appear difficult to argue that an investment in tanker assets is an attractive acquisition opportunity,” the report said.
“We maintain the belief that 2010 will prove challenging for cost-effective mainstream capital-raising projects.”
McQuilling underscored that despite today’s “dismal operating environment”, favourable returns would be seen in equity investment before tax over a longer 20-year project life – which might indicate that the time for buying was near.
“We think opportunities for experienced, committed players with healthy balance sheets, plenty of cash and an appetite for risk will abound in 2010,” the report said.
A McQuilling spokesman tempered its cost structure analysis by explaining it was based on round-trip assumptions, so individual operators could do better if fleets were intelligently deployed.
The poor marketplace would also affect owners differently depending on when they bought the tankers, how much they paid and what their financing structure looked like.
McQuilling assumed that 50% of the delivered price was financed over five years based on an interest rate of 5.2%, with a 20- year project life.
The bunker price over the period was set at US$440 per tonne.
Although banks were lending up to 80% of asset values in mid-2008 at the height of the shipping boom, those still prepared to finance projects now ask owners for more cash up front.
A very large crude carrier, bought for US$72m, would earn an average US$26,700 per year over the next four years based on McQuilling’s projections, well short of the break-even rate of just over US$34,000 needed under its financing assumptions.
The steepest losses calculated were for medium-range (MR) tankers, which saw record deliveries coincide with collapsing demand for refined products in the US and rates hit historic lows of below US$2,000 per day on major routes for protracted periods.
MR tankers would lose nearly US$9m over five years based on forecast average daily revenues of US$6,100, but incur break-even costs of nearly US$15,200, according to McQuilling.
Alongside lower cashflows were falling asset values. Tankers lost an average 34% in price in 2009, while newbuilding prices have declined 30% from their 2008 peak, McQuilling said.
Prices would fall another 15% in 2010, McQuilling forecast.
With 900 tankers above 27,500 dwt on the orderbook, McQuilling believes net fleet growth will peak in 2011 and that the majority of tanker sectors were oversupplied relative to “near-term tepid demand”.
As a result, time charter revenues for VLCCs would rise from an average of US$24,900 in 2009 to US$31,500 in 2010, falling back to US$28,400 in 2011 on routes from the Middle East Gulf to Asia.