Bloomberg News

Oil Tankers Valued as Scrap Jump Fivefold as Returns Collapse

November 27, 2011

Nov. 25 (Bloomberg) -- The number of the largest oil tankers valued at scrap-metal prices jumped fivefold in a year as a glut of the vessels cut their earnings to the lowest level since at least 1997, Seasure Shipping Ltd. said.

One hundred and one very large crude carriers are now valued at demolition prices, up from 19 a year ago, the London- based shipbroker’s VesselsValue.com unit, which publishes prices of more than 45,000 vessels, said by e-mail yesterday. The global fleet contains 575 of the ships. The average age of the 101 VLCCs at scrap value was 18 years, according to Seasure.

“A lethal combination of falling asset values driven by poor earnings, financial distress and a strong market for scrap steel has beached an increasing number of vessels at or close to demolition value,” Alex Adamou, lead quantitative analyst at VesselsValue, said in the e-mail. “A vessel which would have traded at an 81 percent premium to her demolition value in January now finds herself valued as nothing more than a floating piece of steel.”

Frontline Ltd., the world’s largest VLCC operator, said this week it’s seeking talks with creditors and may run out of cash and breach loan terms. Earnings from the vessels averaged $11,372 a day in the third quarter, the lowest since at least 1997, according to Clarkson Plc, the world’s biggest shipbroker. General Maritime Corp., the second-largest U.S. oil tanker owner, filed for bankruptcy Nov. 17.

Oil Demand

Tanker owners ordered too many new vessels during a four- year boom that lasted to 2008, creating an oversupply that’s depressed returns and ship prices as global demand growth for crude weakens. In the Persian Gulf, the largest loading region, ships competing to haul crude have outnumbered cargoes by 16 percent on average this year, according to weekly shipbroker and owner surveys by Bloomberg.

Returns for VLCCs will average $15,000 a day for the next two years, less than half of the $34,500 they need to break even, Pareto Securities ASA said in a report last month. Average earnings for the vessels, which peaked in 2004 at $97,000 and were at $93,000 four years later, fell to $19,000 by 2011, according to the Oslo-based investment bank.

Prices for 15-year-old VLCCs have tumbled 44 percent since the start of the year as scrap values rose 2 percent, said Adamou of VesselsValue. Demolition value is calculated by multiplying the price of steel scrap by light displacement long tons, or the weight of a ship’s hull, machinery and equipment.

About 47 percent of crude oil traded is shipped by sea, Pareto said.

--Editors: Dan Weeks, Sharon Lindores.

To contact the reporter on this story: Michelle Wiese Bockmann in London at mwiesebockma@bloomberg.net

To contact the editor responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net


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