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Industry Note No. 27 - Bunker Price Forecast pdf

Individuals active in the shipping or oil industry are aware that residual fuel and bunker prices have been rising in recent years. In 2012, the basket of bunker prices that we track at major ports reached an all-time high of almost US $750 per ton in early March. This was influenced by an upward spike in crude oil prices combined with robust demand for power generation from various countries. Although prices have since subsided, bunker prices are anticipated to rise in the coming years. This increase will be in line with higher crude oil prices, but also tighter supplies due to secondary capacity additions and changes to the international crude slate. Tanker earnings will continue to be pressured, which will encourage owners to explore methods to boost fuel efficiency.

Industry Note No. 26 - Sailing Towards the Sun pdf

Throughout the year, headlines related to the energy market have been saturated with stories regarding the US oil boom. Oil production in the US was almost 6.5 million b/d at the end of September, the highest level since the late-1990’s, according to the Energy Information Administration (EIA). In the backdrop of this development, there have been discussions about the US becoming the world’s largest crude oil producer by 2020, which are reinforcing the elusive dream of energy independence. In line with this, during the first nine months of 2012, total crude oil imports have declined by 3% compared to 2011. While this statistic is significant, it appears to have a greater impact on the import volumes of sweet crude oils due to the make-up of Bakken crude from North Dakota. Highlighting this, imports from Nigeria have roughly halved to about 400,000 b/d during the reporting period.

Industry Note No. 25 - Private Equity? pdf

Reduced lending activity from traditional ship finance providers has industry participants looking towards private equity investors to bridge the gap in capital. Much of the ship finance lending activity in 2012, and likely continuing into 2013, will focus on restructurings and existing loan portfolios at the large shipping banks. Private equity groups make investments in shipping through a number of different structures including: direct investment, bridge financing, mezzanine financing, debtor-in-possession financing, sale-leaseback transaction, and joint ventures.

Industry Note No. 24 - Covering Your Assets pdf

Despite the pressure tanker markets have been under for the majority of the year, the price of second hand assets has been relatively stable. Figure 1 illustrates the sales price of five year old tankers through the first eleven months of 2012. In the larger tanker classes, five year old VLCC and Suezmax tanker prices were essentially flat while there was a gradual decline in the Aframax, Panamax and MR2 sectors. A five year-old VLCC had an average price of US $58 million year-to-date, down about 40% for the same time period in 2010. Throughout the same period of time, five year-old MR2s have declined by 20% from US $26 million in January to US $21 million going into November. This has occurred despite the robust trading activity of clean petroleum products and highlights the potential pressure facing this sector from a large orderbook and the expectation of future deliveries. As stated in our previous Industry Note, Delayed Reaction, throughout the first 10 months of the year 77 MR2 tanker orders have been placed.

Industry Note No. 23 - Delayed Reaction pdf

Any individual that has a connection to the tanker industry is aware of the glut of vessels that are presently operating in the market. This supply of ships is the result of tanker owner’s confidence on the back of robust rates back in 2008. On their own, the delivery of these tankers would have been enough to pressure owners’ earnings, but in today’s environment of falling oil demand growth and a weak economic outlook, the pinch has become a squeeze.

Industry Note No. 22 - Hurricane Sandy pdf

In the aftermath of Hurricane Sandy, we will attempt to gauge its immediate impact on the tanker and petroleum markets. This is a difficult task as the wake of destruction caused by the storm has cut lines of communication, raising the challenge of discerning rumors from fact. Although the situation seems to be improving by the hour the lack of mobile phone service, computer servers and power have made the last few days trying.

Industry Note No. 21 - 2013 Worldscale Flat Rate Forecast pdf

The Worldscale Association issues updated tanker rates, which are referred to as ‘flat rates’ at the end of each year. These values are given in a US$/metric ton format and are a fundamental component used in the negotiation of Worldscale (WS) spot rates. The WS spot rates, which are barometer for the strength of the spot tanker market, are a percentage of the flat rate, with the latter being equal to the nominal or 100% freight rate. The Worldscale Association publishes more than 300,000 flat rates for various load/discharge combinations. The updated flat rates take effect at the start of the following year, in this case 2013. In an effort to gauge the future direction of the market, we attempt to forecast a series of flat rates based on Worldscale’s “Basis of Calculation”.

Industry Note No. 20 - Tanker Market Outlook Mid-Year Update pdf

At the start of August, McQuilling Services published our 2012 Tanker Market Outlook Mid-Year Update. This report gauges tanker market activity during the first half of 2012 and provides an outlook for the second half of the year and the forecast period. Despite bearish sentiment encompassing the global economy and shipping market at the end of 2011, the 1H of 2012 appeared to support the theory that the worst the current downturn had been consigned to history. A combination of factors that included tanker pools, robust demand from the east and loading delays helped tighten the market.

Industry Note No. 19 - China's Methanol Challenge pdf

In our last Industry Note, we discussed the progression of China’s methanol demand throughout the past decade and its future prospects. In this Industry Note, we will describe the challenges of coal based methanol production and our latest projections on China’s import potential by 2015.

Industry Note No. 18 - A Primer on China Methanol Economy pdf

This Chemicals Industry Note, produced by McQuilling Services Singapore, is the first of a two-part series summarizing the China methanol economy. “Methanol Economy” for China – The global methanol industry has progressed rapidly over the years, driven by the Asian market, with China spearheading global growth. Rapid urbanization, abundance of coal resources as a feedstock for producing methanol and its popularization in many energy applications have propelled China to become the world’s largest methanol producer and consumer. In this paper, we discuss the development of a “Methanol Economy” for China over the last 10 years and prospects going forward.

Industry Note No. 17 - Sailing the Social Seas pdf

For thousands of years, social networking has played an important role in the shipping industry. This cultural phenomenon can simply be defined as the interaction between a group of people who share a common interest. In the beginning, most interaction occurred face-to-face, however, with the evolution of technology, shipping participants found new ways to connect to their social networks. Today, web and mobile based networking technologies, better known as social media sites, have become a popular way for social networks to communicate. Many fear that these digital platforms make relationships irrelevant; however, when looking at the way networking in the shipping industry has developed over the years, new technologies are just a natural progression of communication.

Industry Note No. 16 - US Crude Market Update pdf

Similar to the rest of the world, US oil demand has been under pressure as a weak global economy has reduced consumption and increased volumes of substitute products are being harnessed. However, the Energy Information Administration (EIA) recently forecasted demand at 18.7 million b/d this year and 18.9 million b/d in 2013, yet again making the US the front runner for hydrocarbon demand. Looking further ahead, in their latest Annual Energy Outlook, the EIA expects that after the economy regains its balance, demand will only fluctuate between 21 and 22 million b/d through 2025.

Industry Note No. 15 - Spreading Globalization pdf

Since becoming operational in the early 1900’s, the Panama Canal has been a key component of the global shipping industry. The Panama Canal Authority (ACP) is currently in the midst of an ambitious expansion program that will ensure the canal continues to benefit from rising international trade. At present, the expansion is officially scheduled to be completed by October 2014, the canal’s centennial anniversary. However, some industry reports suggest that this could be delayed by approximately six months putting the inauguration in early 2015.

Industry Note No. 14 - Fifty Shades of Fuel Savings pdf

The title of this note borrows words from a popular series of novels currently on the bookshelves in the US or e-reader screens. It is difficult to predict nowadays what things in pop culture will go “viral.” In the shipping industry, even more so. With rising fuel prices and declining freight rates however, it seems that a focus on the optimum speed of ships would be a clear candidate for public discourse in the industry. To our surprise, it has taken several years to become a “hot” topic.

Industry Note No. 13 - A Needle in the Haystack pdf

Posting a daily assessment of a tanker owner’s TCE is a challenging task. In addition to the fact that owners generally regard consumption statistics of their tanker fleets as a private matter, this daily number is based on a variety of assumptions. The ultimate goal is to reflect market realities in our TCE calculations to gauge market developments and activity. To achieve this we must make various decisions based on available data and discern how it relates to the market.

Industry Note No. 12 - Clean Conondrum pdf

McQuilling Services Industry Note No. 11 discussed the clean tanker trading fundamentals beyond 2014. In Industry Note No. 12, we will study the acquisition economics of a new MR2 following the recent uptick of newbuilding contracts. Those investing in the segment argue that the new, fuel-efficient vessels will be justified in the long run and we will attempt to discover if this is economically so. There is no doubt the more recent MR tanker orders will further impact the supply overhang of this vessel class. The move by several key players including Kingfish Tankers, Frontline and Alterna Tanker Pacific JV during the first four months of 2012 is seemingly premature. It does, however, provide a platform for the discussion of acquiring fuel-efficient tankers during weak market fundamentals. The findings of this note are not surprising, but it does provide some insights with regard to the assessment of the “bottoming-out” price in the MR2 segment.

Industry Note No. 11 - Refinery Rescue Triggers Clean Market Re-think pdf

Optimism has been challenged in the clean tanker market since the start of 2012, even when spot rates appeared to be rebounding in the months of February to March. Nevertheless, these marginal upticks still failed to bring many owners back into the black on their books. Lacking any significant improvement in demand fundamentals in the clean product trades, we were surprised by the surge in MR2 newbuilding contracts that were seemingly mirroring spot rate trends since February. Based on the current delivery profile and looming surplus, we believe these orders may be premature and earnings could suffer.

Industry Note No. 10 - Balancing Act pdf

Tanker owners have been operating in an environment of weak global oil and products demand growth, supply disruptions, financial uncertainty and geopolitical tensions. On their own, these factors would be enough to pressure the market but the steady inflow of tonnage from previous years’ orderbooks further exacerbates the situation. Although the delivery profile is expected to slow around 2014, short-term fundamentals will be pressured by an oversupply of tonnage.

Industry Note No. 9 - Rising Tide or Passing Swell? pdf

Since the start of March, VLCC rates and TCE revenues have been elevated to levels that owners perhaps thought had been consigned to history. In the market of elevated bunker prices, oversupply of tankers and declining Iranian export volumes, the steady increase seems to have caught some market participants by surprise. Although we see factors that should provide a floor to rates, some circumstances that have been supporting rates are likely to gradually vanish in the coming weeks.

Industry Note No. 8 - Reality Bites pdf

The US economy appears to be stabilizing, but rising gasoline prices have surfaced as the latest Achilles heel to the recovery and President Obama’s road to re-election. Data from the EIA shows that since the start of March, US gasoline prices averaged US $3.91 per gallon (US $1.04 per liter), which is the highest seasonal level on record. To make matters worse, forecasts hint that in some regions gasoline is likely to breach US $5 per gallon (US $1.33 per liter) during the summer driving season. This reality would cause headaches for any incumbent US President but during an election year it is more like a crippling migraine.

Industry Note No. 7 - The Dragon's Armor pdf

Since the onset of the financial crisis, global economic growth has been strongly supported by developing economies. Illustrating this trend, the International Monetary Fund (IMF) placed GDP growth in advanced economies at 1.6% while emerging nations posted a 6.2% growth in 2011. Although the figures are lower in this year’s IMF forecast, growth in developing economies is expected to be 5.4%, which is 4.2 percentage points above OECD nations. With an average GDP growth of 10.2% since 2000, China has been a pillar of non-OECD and global economic growth.

Industry Note No. 6 - McQuilling Services Short-Term Outlook pdf

This week’s note provides a summary of our recently published Short Term Outlook. As the first quarter of 2012 is almost consigned to history it is clear that the tumultuousness of 2011 was not a one-off. Tensions between Iran and Western countries are supporting rising oil prices and have the potential to further destabilize an already shaky economy. Meanwhile, developments in Syria, Yemen and Sudan are also limiting oil supplies. There have been some positive indicators out of the United States but other regional economies remain under pressure. The debt crisis in Europe continues to cast a cloud over the continent and on Tuesday, the European Union’s (EU) statistics office released data confirming GDP contracted by 0.3% in Q4 2011. Compounding concerns, China’s official economic growth target of 7.5% for 2012 indicates that even the dragon economy may not be formidable enough to halt the slide.

Industry Note No. 5 - MR2 Atlantic Basin Outlook pdf

The MR2 clean products trade in the Atlantic Basin provided a glimmer of positive market sentiment in 2011. Trade in the region was supported by a variety of factors that managed to absorb tanker capacity. These were the reduced refinery utilization on the US East Coast (PADD 1) and in Europe in the wake of declining demand, combined with the rising cost of crude imports and healthy economic activity in Latin America. Throughout the year, refiners on both sides of the Atlantic announced refinery closures, totaling roughly 1 million b/d of capacity due to persistently weak margins.

Industry Note No. 4 - Investment Considerations pdf

The operating cost structure of a vessel is similar across all sectors in the tanker industry. Cargo handling costs are negligible as compared to the general cargo or dry bulk sector. Port, fuel, canal and other voyage costs are incurred, their magnitude dependant on the voyage itinerary in question. Fuel costs and therefore fuel conservation measures play a much bigger role in liquid bulk transport as the major trades, especially for larger vessels, are primarily long haul with the majority of voyage time spent underway at sea.

Industry Note No. 3 - Tanker Supply Outlook pdf

On the back of the continued weakness in the global economy, oil market disruptions and over capacity, tanker contracting fell to 109 last year, its lowest level since peaking in 2006. Given the current size of the fleet, which stands at 3,498 tankers above 27,500 dwt, contracting is expected to remain low in the short-term. The availability of loans to the shipping industry will remain limited in the current economic environment. This should help the market gradually return to balance as it should continue to limit new tanker orders.

Industry Note No. 2 - Tanker Demand Outlook pdf

In our recently published 2012-2016 Tanker Market Outlook we noted that demand to transport crude oil and residual fuels contracted by roughly 2% from 2010 to 2011. The market for clean petroleum products posted slightly better results, rising by around 1.5% during the same time period.

Industry Note No. 1 - 2012-2016 Tanker Market Outlook pdf

The new year has started with the global economy in a precarious state. Emerging economies are expanding while advanced economies are struggling to keep pace. At the time of writing our 2012-2016 Tanker Market Outlook, global GDP growth was forecast at 4% with the IMF expecting that emerging economies would expand by 6.1% and advanced countries by 1.9%. However, against a backdrop of sovereign credit risks in Europe, a polarized political climate in the US and inflationary concerns in the developing economies, these figures were recently revised down. The tanker market has not been immune to the economic situation.