Floating storage plays on VLCCs aren’t expected in the near future

In Hellenic Shipping News 22/02/2016

Floating storage of WTI became feasible following the recent liberalizing of US crude exports. However, this hasn’t been translated into actual contracts and as it turns out this won’t be the case anytime soon. According to shipbroker Charles R. Weber, “in a theoretical floating storage contango analysis, we examined the profitability associated with storage on a non‐US flagged VLCC loaded via shore‐to‐ ship transfers on lightering tankers due the inability of VLCCs to directly call at the US Gulf Coast’s terminals which have been adapted to process export cargoes. Once factoring for the lightering costs, VLCC time charter costs for the relevant period, bunker costs, carry/capital costs, insurance and operational expenditures, we find that the WTI contango structure is sufficiently steep to maintain profitability through at least 12‐months from the front month, though profits peak at three months from the front month.

According to CR Weber, “despite the seemingly attractive value proposition implied, a number of key factors are likely to prevent such plays from materializing. Firstly, Jones Act restrictions prevent US crude stored or handled by non‐Jones Act compliant vessels to be redelivered to the US. One notable exception would be if the cargo is redelivered into the precise manifold at the same terminal from which it was loaded – in which case the floating storage itself would be considered as auxiliary or tertiary storage, rather than a movement between US ports. This method, however, would limit the ability to unwind the crude to buyers with direct reverse‐pipeline access to that manifold. Secondly, as WTI is cleared at Cushing, from which there are several distribution options to domestic refiners and storage facilities as well as export terminals, WTI crude purchased and held at sea would – due to the prior point – have essentially only foreign buyers in play to buy the cargo as its being unwound from storage, potentially rendering it significantly disadvantaged to WTI cargo settled at Cushing”, noted the shipbroker.

It went on to note that “for Brent crude, high VLCC rates and related floating storage costs wipe out any profitability for floating storage given an insufficient contango curve – and whilst oscillating futures curves have sporadically made floating storage profitable since 2H14, the extent thereof has consistently been insufficient to stoke significant interest. Usual risks and liabilities inherent to floating have been compounded by the commercial risk of volatile differentials between West African crude (a likely floating storage target) and the benchmark Brent prices they trade against”, CR Weber said.

VLCC

Meanwhile, in the crude tanker markets this week, “VLCC demand in the Middle East and West Africa markets was stronger on a w/w basis but gains in the Middle East failed to meet market expectations, given the passing of last week’s holidays in Asia and Latin America and industry events in London and their corresponding lull in demand. The Middle East market observed 25 reported fixtures (+92% w/w) while the West Africa market observed 7 (+17% w/w). Though Saudi stem confirmations materialized, those from the UAE were still being awaited. For its part, the West Africa market remained elevated and drew on Middle East positions, preventing negative pressure on rates from materializing. Additionally, participants expect that next week will be accompanied by further demand gains while vessel supply levels could prove tighter than they presently appear given rising discharging delays in China due to weather and ullage issues – and thus increasingly uncertain itineraries”.

According to CR Weber, “to‐date, 31 fixtures have been reported for March loading with all but one of these for first‐decade cargoes. A small number of additional first‐decade cargoes are expected to materialize while charterers are likely to progress more aggressively into second decade dates during the upcoming week. We project that in light of delays and with the West Africa market having been more active than previously anticipated, the number of surplus units at the conclusion of the first decade will likely tally at just 5 units. The relative tightness implied and with positions thereafter somewhat uncertain due to delayed China discharges, the combination of these factors with an active demand pace should support a stronger rate environment. This week, the AG‐FEAST route rose by 1.5 points to conclude at ws63”, the shipbroker concluded.

Nikos Roussanoglou, Hellenic Shipping News Worldwide

High port dues make coastal movement of cars expensive

In Port News 22/02/2016

Car carrier IDM Symex became the first ship in India to carry automobiles through coastal shipping to Pipavav from Chennai on February 4. But, high port dues make it quite expensive, says the vessel owner Mandeep S Tiwana.

For Roll on-Roll off vessels the port dues are calculated based on Gross Registered Tonnage (GRT).

Port dues

However, if the rate is based on Dead Weight Tonne (DWT) – vessel’s capacity in weight excluding ship’s weight – or the number of units on board, the port dues could reduce to one-third.

The ports need to adjust the rates to suit the trade, said Tiwana. The GRT for normal vessel is around 66 per cent of DWT but on Ro-Ro vessels, the GRT is at times 400 per cent more then DWT.

IDM Symex’s maiden trip from Chennai to Pipavav cost around ₹1.50 crore. Of this, the biggest component was ₹37 lakh towards port charge at both ends; followed by the ship’s running and maintenance cost, including a crew wage of ₹33 lakh; fuel cost ₹27 lakh and insurance ₹4.28 lakh, he said.

The shippers pay only for wharfage, while fees like pilotage and berth hire charge is borne by the vessel owner. Internationally, other ports make difference on the tariff as in Antwerp where the tanker pays 0.36 cents per GRT while Ro-Ro pays 0.17 cents per GRT, he said. In Indian ports dues for specialised vessels like a car carriers, which stays at the port for around 12 hours, is among the highest in the world.

“If the charges are low, we could drop cars and pick up vehicles at ports like Mumbai and Kochi,” said the master mariner who lives in Singapore.

“Coastal shipping complements well with road and rail for better inter-modal transport. We are not blaming port tariff but highlighting the fact that if we treat all vessels on one scale then we will not go beyond dry bulk or wet trade in our country,” he said.

Chennai port

Hyundai experimented with Symex to use coastal shipping as an alternative mode of transport.

The Chennai Port Trust offered wharfage at an economical rate of ₹500 per unit as against the actual rate of ₹1,200, he said.

“The ChPT surprised me with their support. However, all the stakeholders are not working as a team to make the Ro-Ro coastal service a success. In shipping, speed is the key,” he said.

To breakeven is the responsibility of the owners but there should be level playing field if it has to go through the start-up stage by giving concessions.

In certain countries, direct cash incentive is offered to bring business, he said. According to government estimates, diversion of 5 per cent of cargo transportation to a water-borne mode can result in an annual saving of ₹2,000 crore and a reduction of 6 per cent in harmful chemicals and pollutants.

Annual saving

Despite a coastline of 7,517 km, the share of coastal shipping in India is only around 15 per cent of the local freight as against 43 per cent in the European Union. Commodities carried by coastal shipping include thermal coal, crude oil, iron ore and cement, and this has not changed over the years.

Some of the prominent coastal shipping routes are Chennai to Chittagong/Yangon through Haldia/Kolkata, south-bound cargo from Pipavav/Mundra to Kochi; coal from Kolkata to Kandla and Bhavnagar and inland and coastal movement in and around Goa.

Source: The Hindu Business Line

Thirteen – Not Always An Unlucky Number?

In International Shipping News 22/02/2016

Back in early 1999 the price of a 5 year old Panamax bulkcarrier dipped to $13.5m, and ever since analysts have hailed purchase decisions made at that time as some of the most lucrative shipping deals ever seen. Today, with the price back at $13m, perhaps it’s a good time to reflect on how successful investors were back in 1999 and whether there are similar opportunities once again.

What Was The Deal?

The graph shows for each year since 1990 the return that would have been generated by the purchase of a 5 year old Panamax bulkcarrier at the start of the year, the subsequent operation for ten years at the prevailing one year timecharter rate and then the sale of the unit at the end of that period as a 15 year old (for units purchased in 2007 and later, disposal at start 2016 was assumed). At the end of 1999 investors could pick up a 5 year old Panamax bulker for $14m. Trading that vessel at the start year one year timecharter rate for 10 years would have generated estimated earnings of $66.5m (after opex), and then as a 15 year old unit in 2009 the vessel could have been sold for $12.5m. That’s a small loss of $1.5m on the asset but still a total return of $65m, and an impressive internal rate of return (IRR) of 26%.

Playing Snap

A few years later, 5 year old Panamax bulkcarrier purchases did perhaps even better. Buying a 5 year old in 2002, once again at $14m, trading at the timecharter rate and selling as a 15 year old would have generated total returns of $73.2m and an IRR of 41%, whilst the equivalent project in 2003 would have generated $66.1m and an IRR of 44%. These vessels would have generated boom earnings earlier in the project period, subject to a heavier weighting in terms of the internal rate of return calculation.

Not Always A Good Hand

However, not all investors are so lucky. In this example, 5 year old ships purchased since 2008 (and sold this year, so admittedly with less time to hit upon a period of boom earnings) generated negative returns, and those purchased pre-1995 an average IRR of 7%. Buyers in 2008 would have lost a whopping $82.1m on the asset. Nevertheless, there was clearly a golden period; in the years 1998-2006 investors would have achieved an IRR ranging between 20% and 44%.

Unlucky (Or Lucky) 13?

So for those who have had the stomach to buy in at difficult times, there have been more than ample rewards. Today the price of a 5 year old Panamax is back at $13m. Dry bulk fundamentals, particularly on the demand side with the Chinese economy maturing, don’t look helpful at all (see SIW 1207), but with the 5 year old price at almost half that of a newbuild, who really knows what the longer-term opportunity might be?

Fortune favours the brave, but they also say that fools rush in. The outlook seems scary but investors might also have half an eye on their peers who invested at low points in the price cycle in the past. That’s the beauty of volatile and cyclical sectors, but it’s tricky food for thought for shipping investors. Are they willing to party like it’s 1999? Have a nice day.

Source: Clarksons

Export of first Sabine Pass LNG cargo imminent as Asia Vision docks at facility

In Freight News 22/02/2016

The first LNG cargo from Cheniere Energy’s Sabine Pass export facility in Louisiana, could be imminent, as the LNG carrier Asia Vision docked at the facility Sunday, Platts trade flow software cFlow showed.

The Asia Vision and the Energy Atlantic, both with a capacity of 160,000 cu m, arrived in January to the Gulf of Mexico and have remained idle. The Energy Atlantic remains in the Gulf of Mexico as of Sunday.

Cheniere had previously said the first cargo from the facility would be due in late February or early March.

While US LNG exports from Kenai, Alaska, began as early as 1969, Cheniere’s new export facility will be the first to send gas produced from the Lower-48 states to consumers across the globe.

Most of the offtake from Cheniere’s first liquefaction train at Sabine Pass was sold to BG Group, which agreed in October 2011 to purchase 182.5 million MMBtu/year over a 20-year period at a cost of 115% Henry Hub plus a fixed liquefaction fee of $2.25/MMBtu.

Additional offtakers from Cheniere’s Sabine Pass include Spain’s Gas Natural Fenosa, South Korea’s Kogas, India’s Gail, France’s Total and UK’s Centrica.

Upon completion, the six-train Sabine Pass export facility will have a total export capacity of 27 million mt/year (1.26 Tcf/year or 35.7 Bcm/year of gas), according to Cheniere.

Source: Platts

Vessel owners suffer

In International Shipping News 22/02/2016

Owners of significant floating assets are continuing to feel the pinch in the offshore market as rates sink to “unsustainable levels.”

Floating production specialist BW Offshore says it is cutting its onshore staff by 35%, while Norwegian offshore ship owner and operator Deep Sea Supply is laying up any vessels without fixed contracts in coming months and GC Rieber has taken a hit due to the bankruptcy of a client.

Deep Sea Supply said Q4 saw a continued weakening of the global offshore support vessel (OSV) markets, with Brazil remaining difficult and the North Sea spot market seeing “unsustainable rate levels and low utilization.”

It says contract coverage for 2016 is “not satisfactory” and predicts no improvement in the market situation for OSVs in the short to medium term. It is selling two anchor handlers, laying up vessels which do not have fixed activity within the next months and reducing its operating expenses on working vessels.

Deep Sea Supply’s 2015 consolidated revenues were $132.4 million, with pre-tax losses of $ 119.8 million.

BW Offshore said its cost reduction and “right sizing” would save annual costs of around US$30 million. It did not say how many staff would be impacted and doesn’t give total onshore staff numbers.

BW offshore says the organizational changes, due to complete in Q1 2016, were a consequence of the current market conditions.

“Macro conditions for the offshore industry have continued to deteriorate over the past months and BWO expects reduction in industry capital expenditure to continue,” the firm said. “The FPSO industry is equally affected and the situation does not seem likely to change in the short term.”

The firm, which posted a US$216 million net loss in 2015, compared to a $187 million profit in 2014, operates 17 floating production vessels (FPSOs), of which 14 FPSOs and one floating storage and offloading vessel are owned.Earlier this month, BW Offshore said overall uptime on the firm’s fleet in Q4 was 99.6% excluding the Cidade de São Mateus, which is yet to be taken off station following a fire 11 February 2015, in which nine people died.

The firm’s BW Athena is due to come off hire this month. The FPSO Azurite is currently being marketed for new projects after being returned by the client and the FSO Belokamenka has been returned to BW Offshore.

GC Rieber’s profits have taken a hit after suffering from the bankruptcy of Dolphin Geophysical, with which it had vessel lease deals. Its fleet utilization was 73%, compared to 100% in Q4 2014.

“The current market situation in the offshore segments is challenging to say the least, and unfortunately is affecting just about everyone operating in this space,” CEO Irene Waage Basili says.

The group posted a loss of NOK 400.1 million in Q4, compared to a loss of NOK 201.4 million in the corresponding period 2014, however, this includes a loss of NOK 189.7 million on accounts receivables related to the Dolphin Geophysical bankruptcy.

Due to the market deterioration, a NOK 132.8 million impairment on the value of the fleet was also made in Q4, increasing total 2015 impairments to the fleet to NOK 251.6 million.

GC Rieber’s contract coverage for the years 2016, 2017 and 2018 is 43%, 36% and 22% respectively.Meanwhile, another Norwegian vessel operator DOF is faring marginally better with average vessel utilization of 87% in Q4, with 84% in the subsea fleet, 81% in the anchor handler fleet and 96% in the platform supply vessel fleet. Two vessels were in the North Sea spot market and two were laid up, with one of those sold in December. The contract coverage for 2016 for the combined fleet, excluding options, is 70.9%; 80% for the PSV fleet, 69% for the AHTS fleet and 65% for the subsea fleet.

Source: Offshore Engineer

Battered shipping industry faces grim choices as demand for commodities falls

In International Shipping News 13/02/2016

The shipping business has gone from bad to worse.

As global trade slows, owners of the ships that carry industrial commodities across oceans are reeling from falling demand for coal, iron ore and other industrial commodities, which has sent shipping rates to new lows. The decline has been hastened by an oversupply of ships ordered as the world’s economies recovered from the Great Recession.

Danish shipping and oil conglomerate A.P. Moller-Maersk underscored the depth of the slump on Wednesday when it blamed slumping trade and low crude prices for an 80-per-cent drop in 2015 profit, declaring conditions worse than during the financial crisis.

To reduce competition and cut costs amid falling revenues, the shipping industry is scaling back fleets and consolidating. State-owned companies China Ocean Shipping Co. and China Shipping Group have merged, and Neptune Orient Lines Ltd. of Singapore was recently taken over by France’s CMA CGM SA.

Hyundai Merchant Marine Co., one of South Korea’s largest carriers, is dumping assets in a bid to avoid joining a growing list of shipping companies that have gone bust in the past year.

But more bankruptcies are inevitable, as economic activity stalls and ship owners are forced to slash prices to compete, said Rahul Sharan, an analyst with London-based Drewry Shipping Consultants Ltd. “I don’t think anyone is making money,” Mr. Sharan said from New Delhi.

The Baltic Dry Index, a closely watched economic indicator of the shipping rates for carrying coal, ore and other raw materials, is at the lowest point since it was first launched in 1985 and has fallen by 76 per cent since the peak of August, 2015.

Most – but not all – of the decline in commodity demand is because China, the world’s biggest buyer of coal and iron ore, has been throttling back purchases as its economy and industrial output slows, Mr. Sharan said.

There are no signs demand and prices for industrial commodities will rebound soon. China’s economy is forecast to grow at an annual rate of less than 5 per cent over the next five years, while Canada, the United States and Europe will post low single-digit growth, according to the Conference Board. For the companies that carry industrial goods, this means losses will continue into 2017, according to Drewry.

Mr. Sharan said money-losing shipowners have three choices when faced with poor demand for their fleets: they can eat the cost of docking the ships, hire them out at rates that are less than their daily operating costs of about $9,000 or they can sell them to a scrapyard. Increasingly, they are taking the third route.

BIMCO, a shipowners’ association based in Denmark, said record tonnage of large bulk carriers was sailed to the scrapyard in 2015. And the average age of ships being cut apart for steel has dropped to less than 21 years from 25, even as prices for scrap metal are low.

“This increasing demolition is a very welcome development, but a lot more ships need to be scrapped in order to improve on the unfavourable market conditions present in the dry bulk market,” said Peter Sand, BIMCO’s chief analyst.

The fleet paring by money-losing shipowners is welcomed by companies looking for bargains on second-hand ships.

Drewry said the global fleet of ships that carry dry commodities grew by just 2 per cent in the first nine months of 2015, but it will be about five years before the surplus of ships that spurred much of the rate decline will be gone.

Drewry says the trade in iron ore will grow moderately over the next few years, but coal shipments to China will continue to decline. The country is trying to support domestic sources at the same time it is moving toward more environmentally friendly energy sources.

For coal miners and shippers, a bright spot is India. Despite its intentions of becoming self-reliant, the country’s consumption and imports of coal for power generation are rising, Drewry said.

Source: Globe & Ma