Ship Chartering: CHARTERING TERMS DEFINITION

Ship Chartering: CHARTERING TERMS DEFINITION

Maritime Market Report - Week 11-08

Tanker Market: Stable

The VLCC market this week has seen some softening owing to limited demand and plenty of tonnage supply in the MEG. 78 VLCC's were available this week compared to 68 last week in the MEG. The Atlantic VLCC market was also lackluster. However, the WAF suezmax market showed a little more activity, but the rates started to drop by the end of the week to ws 142. Little change was also observed in the NSea Aframaxes. The Med/BSea Aframax market saw some firming with rates climbing to ws160. The upcoming Easter holiday season is already putting a damper on rates and we don't expect rates to rally anytime soon.
The east of suez LR market has been relatively quite this week. The MR's on S'pore/Jpn route 30,000 mt saw some firming to ws 200 lvl. Lumpsum rates for Med/UKC cargoes was stable around 2.1 million basis 65,000 mt [http://www.fearnleys.com/]. The transatlantic market was also soft with rates sliding to ws225 basis 37,000 m/t. Similar, weak market was visible in the NW Europe handies and the caribs basis 38,000 m/t. We don't see any significant improvement in the the market with the easter holidays coming up and wide availability of tonnage.
Following vessels were sold this week [Fearnleys]
Vessel Size Built Buyer Price Comments
Tohdoh 261200 1991 Undisc 42.5
Apollo Sun 259000 1985 Pvt
Piemonte 114000 1987 China 18 D/Sides
Emerald Isle 68300 1989 China 25 D/Sides

Dry Bulk Market : Active
The handysize average index rose more than usd 2000 this week with improvements in all areas. MV medi Dublin was said to fixed at a staggering usd 100000 for a ECIndia to China voyage. The short period employment was reported close to usd 64000 lvl.
The panamax market was relatively stable this week with the average for the 4 t/c routes up usd 3000. Atlantic rounds are now fixing about usd 70,000 daily and trip to Far East done today at usd 80,000 on LME type. An LME type fixed open Porto Vesme mid march at usd 77,000 for 11/13 months. Pacific rounds now concluded around usd 60,000 lvl, while low/mid usd 50,000 for backhaul.
In the capesize market the market seems to have peaked with slower trend evident. The t/c index average was reported up usd 5000 from lase week, but weakening because of lack of fresh cargoes. Brazil/China route was around usd 70 and Tubarao/Rdam reached usd 35 lvl. Major Japanese chtrs/ownrs reported securing NB capers for dely as far ahead as 2010, no confirmed details reported. The Baltic index was up 280 points to 8346 this week.

Gas Market: Low
No improvements in the gas markets observed this week. The gloom will persist in the market for the coming weeks with low LPG prices and the export cuts announced by mideast producers. The market might show some signs of improvement once the mid-east suppliers accept April liftings.

New Building Market : Strong
Steady activity was seen in new orders this week with dry bulkers ruling the roost again. Howevr, the demand is still below the 2007 level as reported by fearnleys. Stealth Gas contracted 2 LPG newbuildings 5000 & 7500 cbm at Kanrei Zosen delv 2010/11. Shanghai Puyuang also palced orders for 4 VLOC's at Guangzhou Longxue delv 2011/12.

LNG: Sailing into Uncharted Waters

A wave of both liquifaction and regasification capacities are going to come online in the next few years totalling roughly 82 mil tpy and 232 mil tpy respectively. However, following this wave are a number of factors that could obscure the future of world natural gas trade.

Most of the capacity additions are slated for this year with projects set in motion 3-5 years ago coming online. The 49.5 mil tpy additional liqufication capacity coming online this year, will be mostly in the middle east, especially with almost 39.5 mil tpy capacity attributed to new projects in Qatar [IEA, World LNG report, OGJ]. Other areas of the world like Russia's Sakhalin project, Nigeria, Australia, Yemen and Indonesia will see more production [http://www.ogj.com]


A record amount of regasification capacity is also slated to come online in the next few years to 2009. In the US alone 65 mil tpy is slated to come online this year, mostly on the US Gulf coast. Mexico and Canada will add another 25 mil tpy this year bringing North America capacity close to 90 mil tpy [IEA, World LNG report, OGJ]. Euopean capacity additions will also be similar [26 mil tpy] mostly in the UK and France. India, China and Korea are likely to add another 26 mil tpy this year. This would bring the world regasification capacity increase in 2008 to roughly 144 mil tpy.

A couple of new projects that had almost stalled showed some sign of life and will probably come to fruition. The Chevron and Angola LNG project has been approved for construction. Chevron owns 36.4% share in this project with Angola LNG Ltd with BP (13%), Total (13%) and Sonangol (36.4%) being other Angola LNG Ltd shareholders. It plans to move off-shore LNG to a reliquifaction plant in the Soyo region and will be able to handle 1 bcfd of associated gas and produce 5.2 mil tpy of LNG [OGJ]. It will also supply 125 MMbcfd to Sonangol for local consumption. First LNG is scheduled for 2012 and will be delivered to Gulf Energy's planned terminal on the Mississippi gulf coast.

In Autralia, the Woodside Energy's Pluto field project situated 100 kms of the coast of western Australia has also been approved for construction. The project involves developing the off-shore gas field with estimated reserves of over 3.5 tcf and a onshore liquifaction plant in the Pilbara region. The project will produce 5-7 mil tpy of LNG, with the first phase coming online with 4.8 mil tpy train by 2010.

We see from above that there is a growing gap between the liquifaction and regasification capacities around the world. This dearth of production capacity can be mainly attributed to a surge in raw materials cost in the past couple of years. Upstream capital costs of LNG projects have increased by almost 80% since 2002 [Cambridge Energy Associates]. The capital costs of annual capacity in an LNG project rose from $200/tonne in 2002 to $600/tonne in 2006 . The surging economies of China and India are mainly responsible for gobbling up the raw materials and labor in the last 5 years and causing the price of commodities to spike.

Other significant challenges exist to the global natural gas trade. Higher natural gas prices in countries like the US, have spurred investors to look at alternatives to natural gas like coal and considerable amount of money is flowing into new clean coal tecnologies [http://www.worldmaritimeconsultants.com]. The disfunctional pricing of natural gas in the major consuming markets has also led to uncertainty and reduced predictability for investors. Finally, the developing markets themselves are going to consume a larger share of their production, reducing the available capacity for global natural gas trade.

Dry Bulk Shipping - Setting Course for China

Extreamly volatile is how one can describe the dry bulk market of the present and the past few years. It started with a record year in 2004 when new building prices, sale and purchase prices, charter rates hit all time highs. After moderating a bit in 2005 they again rose strongly in 2006 and 2007. The most important driver behind this phenomenal rise has been the staggering import demand for commodities from China. Chinese dry bulk import volume nearly doubled from 2001 to 2004 accounting for roughly 94% growth in demand for dry bulk trade [Stopford, Martin, Dec. 7, 2005: “China in Transition: Its impact on shipping in the last decade and the next.” Clarkson Research Services Ltd.].

This demand was further supported by the lack of Chinese logistical infrastructure which lead to port congestion and long delays at Chinese ports, putting upward pressure on charter rates. The rates rose from $7/ton in the 1990's to $30/ton in 2004 and by mid 2007 Brazil/China route vessels were reported fixed for $60/ton [http://www.fearnleys.com].

The average earnings of a Handymax vessel in 2007 were over usd 48000/day while the historical earnings have been at around usd 15000/day over the last decade [http://www.worldmaritimeconsultants.com]. The Panamaxes in 2007 averaged around usd 55,000/day, while the Capesize's hit the bullseye commanding an average of over usd 1,00,000/day with a lot of vessel fixed over usd 150,000/day for a 1 yr T/C.

The year 2008, started with the scare of US recession and that has put a damper for the moment on the prospects of the future Chinese commodity demand and this fear has been reflected in the charter rates which have fallen by almost 20% across the board. The market is stabilizing a bit, however it can't seem to decide whether this is temporary or based on physical support. The market hasn't really absorbed the effects of the actions of the Fed, the impact of the global financial crunch and how the long term iron-ore contracts will turn up?

The dry bulk market has become more balanced in the last year owing to the new buildings being delivered that were ordered in 2004/05 and minimal scrapping. The existing order book now stands at almost 64 mn dwt, about 18% of the existing fleet [end 2006]. The balance is expected to weaken in the near term, although strong demand growth is expected to continue for 2008.

In the medium term fleet growth will be limited owing to more scrapping of the older vessels in 2008/09. The dark clouds of a US recession might scare away any future investment by the ship owners both for new buildings and conversions. Therefore, I feel in the medium term as demand continues to grow albeit at a slower pace, the balance will become tighter helped by constrained supply.

The New Sultan of the Sea: VLOC's

The absolutely sizzling dry bulk market and IMO 13 G regs have made the conversion of older single hull VLCC's into VLOC's a commonplace. Nearly 30 vessels are up for conversion as per the latest reports from the industry. China's growth and in turn it's appetite for commodoties has led to this fire in the dry bulk market, especially the iron ore demand. This has further led the big producers from Brazil [CVRD] and Australia [Rio, BHP] to concentrate on larger vessels to maximize economies of scale and decrease delivery cost of bulk product sold on CIF basis to China.

Shipyards in China are turning single hull VLCC's into VLOC's instead of refurbishing them as double-hull vessels. COSCO alone is looking at converting 10 vessels in the next 2 years [Li Jian Xiong, Cosco]. Mitsui OSK Lines is also considering converting some of their older single hull VLCC's. Shipyard capacity seems to be the deciding factor as to how many will eventually see new life a VLOC's in the coming years [http://www.worldmaritmeconsultants.com]

The economics of converting a VLCC into a VLOC's seems to make perfect sense at the present moment based on the following calculation [McQuilling Services];

Conversion Cost = 25 million USD

TCT Tubarao/Beliun = 60,700 USD/day [Average 2006 earnings based on 165k mt on this route]

Share of project Financed = 65% @ 8% per annum

The conversion cost based on the above assumptions would be paid of in 17 months [8 round trips] or at minimum monthly payments after 5 years of trading with a net cash flow after financing and operating costs of USD 40,700/day [http://www.mcqservices.com/]

These converted vessels are expected to trade for roughly 10 years after conversion, enough to more than recoup their cost of conversion and provide a lucrative alternative for dry bulk owners to sending their older VLCC's for scrap.