02-06-2018

Norway’s Frontline does not yet expect tanker rate upturn

Norwegian independent tanker operator Frontline said that the weak freight market was not yet ready for a turnaround, as the changes it saw in market fundamentals would take some further time to work through.

Further rate falls in the second quarter also are likely, the Oslo listed group said as part of the release of its first-quarter results.

Frontline said that its VLCC time charter equivalent earnings fell to $14,900/d in Q1 from $19,400/d in the fourth quarter.

But it estimated that it would earn an average TCE rate of $11,600/d for the second quarter.

TCE rates for the Supramax tankers dropped to $15,400/d in Q1, from $19,500/d in the fourth quarter, it said, and projected that earnings in Q2 would fall further to $14,000/d.

LR2 TCE earnings actually gained in Q1, rising to $14,800/d, up from $14,400/d in Q4. But the company predicted TCE earnings in Q2 would fall to $12,400/d.

“The spot rate environment was weak in the first quarter as inventory draws impacted a freight market that was already suffering from high fleet growth,” said Chief Executive Officer Robert Hvide Macleod.

“While there are encouraging signs that seaborne crude volumes may soon increase as a result of changes by OPEC and a slowing trend of inventory draws, the market is not yet factoring in upside potential,” he added.

Amid the weak rate environment, Frontline posted a Q1 loss of $13.6 million, against a profit of $27.02 million for the same period a year ago.

Frontline said the past two years had been characterized by a large growth in the global crude oil tanker fleet, and said this growth had continued in 2018.

So far, it said, 13 VLCCs had been delivered this year and an additional 43 VLCCs were scheduled for delivery to the global fleet in 2018.

Although some of these were expected to be pushed to 2019, the company said it expected the final number of deliveries to be between 40-45.

This compared with the 50 VLCCs delivered in 2017 and 47 in 2016.

“The number of crude oil tanker newbuilding orders was lower in the first quarter of 2018 than in the prior quarter, and we expect newbuilding ordering to slow further in the near term,” Frontline said.

“Newbuilding prices have increased, driven by steel costs and constrained shipyard capacity.”

Frontline said scrapping had increased considerably in 2018. According to broker reports, 22 VLCCs have been scrapped so far and additional VLCCs had been sold for near-term scrapping.

The company said that consistently high scrap prices had combined with the very weak freight market to compel owners of older tonnage to dispose of their vessels at a near record pace.

Frontline added that if the pace of scrapping continued, the global VLCC fleet would see negative growth in 2018.

It said the surge in scrapping was a positive factor that would help to reduce net fleet growth, but noted it would likely “take some time” before the market rebalances.

In Q1, OPEC and non-OPEC production cuts resulted in crude oil inventory draws, decreased arbitrage opportunities and ultimately reduced the demand for crude oil tankers, it noted.

“We believe, however, that we are approaching the end of a crude inventory cycle and that inventories will stabilize and then begin to build again,” Frontline said.

It said there was an historic relationship between crude stock levels and freight rates, with periods where rates rise as inventories build and decline as inventories are consumed.

Noting that despite the persistence of a weak rate environment, cyclical changes were underway, adding that until they came to fruition, the company remained sharply focused on maintaining cost-efficient operations and low breakeven levels.

Frontline is controlled by Norwegian shipping billionaire John Fredriksen.

Source: Platts

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