06-11-2018

Shipowners Marooned By Rising Bunker Prices

Tanker owners have experienced similar problems to the container liners with this year’s jump in bunker costs.

The owners have struggled for much of 2018 as rising bunker fuel prices squeeze daily earnings, with shipowners often barely covering operating expenses on a number of key routes. And there appears little let-up on the horizon.

Bunker fuel prices have soared in 2018 as the 1.8 million b/d production cuts from OPEC, Russia and its allies to rebalance the market pushed up the price of crude oil, which translated into higher fuel prices.

Economies of scale are now the priority as bunker buyers find alternative means to reach the most economic port, by slow steaming for instance, in order to minimize bunker costs at a time when earnings per day are slack.

The message seems to be that shipowners are just buying enough to safely reach the next port.

Worldscale flat rates for 2018 voyages, which came into effect on January 1, showed an average increase of around 15% from 2017. The rates were calculated using average fuel prices from October 1, 2016 to September 30, 2017, when prices for IFO 380 CST as well as low sulfur fuel rose considerably.

However, while flat rates rose, Worldscale multipliers dropped across the board for all crude vessel classes to reflect the higher flat rates on offer, with most vessel classes oversupplied with tonnage.

No subsequent bunker price increases which occurred after September 2017 were incorporated into 2018 Worldscale flat rates.

Shipowners have had to swallow the higher bunker costs with flat rates failing to capture the increase and the weak market meaning they are unable to pass on the costs to charterers.

Other sectors have coped better with higher bunker costs, with VLCCs benefitting from stronger demand in the Persian Gulf. Even so, real earnings may be a lot lower as most, if not all, ships will have a mortgage against them which has to be serviced along with other costs such as insurance, so it remains a challenging operating environment.

The VLCC orderbook-to-fleet ratio is rising, up one third from last year — from 90 to 120 vessels, approaching 17% of the total fleet. If the orderbook-to-fleet ratio hits 25% then destruction looms — similar to the 10 bad years that the dry-bulk Capesize market found itself in due to overbuilding, according to another shipowner.

While bunker prices have been on an upward trajectory for much of the year, clean product tanker rates have stagnated. “The natural thing here would be for [multiplier] rates to compensate for how low the flats are, but this is not the case. So naturally shipowners are struggling and will not be able to sustain this situation for much longer,” one shipowner said.

As IMO 2020 approaches shipowners in oversupplied tonnage markets are looking forward to the prospect of increased scrapping rates, in order to remove the least efficient vessels from the fleet. This will reduce the fleet and decrease the competition for cargoes, whereas competition among a large fleet for few cargoes has been a prevalent feature of the last 12 months.
Source: S&P Global Platts

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