Shipping companies are struggling to make profit in their tanker segments despite the seasonal demand from western countries that require fuel for heating purposes pushing the freight rate for these vessels. Post the economic crisis that saw the ships being laid up, the bulk carrier segment has already turned profitable as the demand for iron ore and food grain supply has seen a global traction. But the tanker segment is eluding profitability.
The Baltic Dirty Tanker Index (BDTI) and the Baltic Clean Tanker Index (BCTI), the global benchmarks for the freight rates of crude carriers and product tankers, have surged 23 and 30 per cent, respectively, since November 1 to 720 and 576. “The situation is still not very comfortable for tankers; the companies are barely achieving the break-even at these levels,” said A R Ramakrishnan, chief executive officer of Essar Shipping that owns a diverse fleet of 25 vessels.
Freight rates for very large crude carriers (VLCCs) had an average of $15,642 in November. Last week in the spot market, the freight rate for VLCC reached $22,501 per day. “A lot of crude carriers have been bought at a very high price; for such ships the break-even including their interest cost is as high as $40,000 per day,” Ramakrishnan said.
The stock of the company has gained 14 per cent since October-end to Rs 68.6 a share on the Bombay Stock Exchange (BSE) on Wednesday. Sensex, the benchmark index of the exchange, gained 7.7 per cent to 17,125.2 in the same period. Break-even for tankers, including their interest costs, vary in the range of $20,000 per day to over $40,000 per day, depending on the cost of the vessel. Six years ago, VLCCs were available for $70 million and at the peak of 2008, it was bought by the companies for $175 million to $180 million. Operational break-even is, however, achieved at $7,000 to $8,000 per day of freight rate for tankers.
“Demand for oil has picked up from India and China, but the real demand from the developed countries is yet to pick up,” said Yudhishthir Khatau, managing director, Varun Shipping, which has 20 vessels including three tankers, 10 gas carriers and seven offshore vessels. Varun Shipping has reported a 5 per cent gain to Rs 56.1 a share on BSE since the end of October. Companies having a mix of dry bulk carriers and tankers are balancing their loss of this segment from the profit of dry bulk carriers. “Dry bulk ships are making very good profit at this level,” said a spokesperson of Great Eastern Shipping, India’s second-largest shipping company. The company currently has 37 vessels with a total capacity of 2.84 million dead weight tonne (mn dwt). Out of this, 2.41 mn dwt is with tankers and 0.41 mn dwt is with the dry bulk segment. For a six-month contract of Capesize vessels, the largest dry bulk carriers, the freight rates have reached $60,000 per day for Atlantic delivery and $54,000 per day for Pacific deliery.
The break-even for such ships is a maximum of $30,000 per day, including their interest cost and depreciation. So, at the current freight rate, these ships are making a profit of $30,000 on short-term contracts. The stock of the company has gained 13.4 per cent to Rs 272.8 a share on BSE since October-end.
“The surge in tanker rates is only seasonal,” said Vikram Surayvanshi, an analyst with Karvy Stock Broking, a Mumbai-based brokerage tracking shipping firms. “Unless the fundamentals change, it is tough for tanker rates to sustain at high level,” he said. The fundamentals such as oil producing countries’ target of production impact the demand for tankers. Besides, the Chinese and Korean governments have extended support to the yards which were having cancellations. The new supply will impact the demand for tankers rates.
Globally, the shipyards have order book for new ships that is about 30 per cent of the existing fleet. Of this, about 13 per cent of the existing fleet is single-haul tankers, most of which is due for replacement next year. There would still be about 20 per cent increase in the existing fleet for tankers in the next few years.
BDTI had reached the high of 2,347 on July 23 last year following the crude price reaching an all-time high of $145.6 a barrel for Brent on July 3.
And it fell to the level of 453 on April 15 this year as crude prices crashed below $40 per barrel. The clean tanker index also had its high of 1,509 last year in June and it crashed to 345 in April this year along with the crude price movement.
