The Hindu Business Line : Why shipping cos are on VLCC buying spree

A 2.61 lakh dwt VLCC bought by Great Eastern Shipping recently. Though both newbuilds and second-hand carriers are much costlier this year, strong freight market projections have made Indian lines go on a large carrier acquisition spree.

IT WAS one of the most fiercely contested bids in the shipping world in recent times. When PT Pertamina invited bidders to participate in the bid for two of its Very Large Crude Carriers (VLCCs), more than 40 participants from round the globe queued up for the ships.

Ultimately, Bermuda-based tanker company Frontline Ltd, which owns 35 VLCCs, elbowed aside the other bidders, including India's Essar Shipping Ltd and Overseas Shipholding Group Inc of the US, to acquire the two ships for a consideration of $184 million. This is only one of the recent indications of the degree to which temperatures in the global VLCC freight market are shooting up, as oil companies are increasingly looking for movement of oil in bigger parcels.

Indeed, apart from Essar Shipping, which has one VLCC, most Indian shipping companies are now looking out for acquisition of VLCCs, even though the second-hand market for such carriers is quoting an all-time high rate, given the guaranteed returns that these would earn in the coming months.

Industry sources said while Shipping Corporation of India (SCI) is planning to buy two VLCCs, in the private sector, Great Eastern Shipping, which bought one last November, will be receiving one more shortly, and Mercator is looking for one or two such carriers.

One indication of the promising future of VLCCs can be had from the rising cost of such carriers in the newbuilding market as well as the second-hand market. In June 2003, a new VLCC could have been purchased for $67 million and a five-year old carrier for $61 million — exactly a year later, the newbuilding prices for a VLCC were quoted at $89 million and a five-year old at $84 million.

In fact, between January and June this year, the second-hand prices for VLCCs have risen from $72 million to $84 million. "The fact that buyers are willing to pay so much even for a second-hand VLCC goes to show that they are assured of the returns in the light of strong freight market projections," an industry analyst said.

What is driving the VLCC freight market? International Energy Agency (IEA) of France has revised oil demand estimates for the sixth time in 2004 to 80.9 million barrels per day (mbd) for the summer months, which is unusual.

This projects a fundamentally strong market for crude ahead, as it is a 24-year high number, marking a total increase of 2.3 mbd from 2003 levels, with one third of the increase in demand flowing from "energy-starved" China, analysts say.

The second factor is the increase in production by OPEC to meet the increased oil demand— OPEC-10 boosted May crude supply to 26.1 mbd, while OPEC agreed to raise production targets by 2 mbd to 25.5 mbd from July. "There is a definite correlation between OPEC production and VLCC freight rates, with the coefficient of correlation between the two being as high as 0.9," shipping analysts pointed out.

This surge in demand has driven up VLCC freight rates like never before. Usually, the freight rates peak in the winter months — in January this year, the monthly average earnings for VLCCs per day peaked to $74,105.

What is significant is that even in the summer months, the rates are close to the January peak rates.

For example, in May this year, the monthly average earnings per day touched the $51,119 mark, as against $33,971 per day in May last year.

"The May rates seldom come as close to the January peak as it is this year. This clearly indicates the buoyancy in the VLCC freight market and hence the rush for such carriers," a shipping analyst said.

For Indian shipping companies, going in for VLCCs has acquired a new sense of urgency, as Indian oil companies are waking up to the benefits of transporting oil in VLCCs, after importing crude oil in smaller ships for the last 40 years.

The reason is not far to find — at prevailing market rates, the cost of transporting crude on VLCCs is about 60 per cent that of smaller Suezmax tankers, which are half the size of the large carriers.

"One can work out the economic benefits, given the fact that at current market rates, the cost of importing crude from the Middle East to the West Coast of India on a Suezmax is about $6 per tonne. Similarly, to ship crude from Basra in Iraq to Vadinar in Gujarat, the VLCC route would be cheaper by Rs 13 crore per million tones, compared to the Suezmax route," according to analysts.

Moreover, India gets around 15 parcels of VLCCs a month, while the Indian tonnage is not sufficient to service the full trade.

"This means, for VLCC owners, there is a market right here in India," say analysts.

Thus, going by these projections, shipping companies will be cashing in on the surging VLCC freight market in the coming months by going in for new acquisitions.