Tanker Trade & Chartering
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Major Oil trade routes
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Ton-mile demand
• One of the most important factors in the crude tanker industry is
the shift in trade routes. A longer route means a longer time for
vessels and an increase in the ton-mile demand, which benefits
companies like Frontline (FRO), Teekay Tankers (TNK), Tsakos
Energy Navigation (TNP), Nordic American Tankers (NAT), DHT
Holdings (DHT), and Euronav (EURN). In this article, we’ll look at
the changing trade routes in the crude tanker industry
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VLCC routes
• According to Poten and Partners, there was a significant
increase in movements from the Arabian Gulf to the Red
Sea. VLCC fixtures on this route increased almost five
times from 12 in 2014 to 56 in 2015. According to the
same report, India has shifted its purchases from the
Middle East to West Africa. In 2015, India picked up its
purchases of West African crude, which resulted in a 35%
increase in VLCC spot fixtures compared to 2014. As West
Africa increased exports to India, it reduced its exports to
the Atlantic Basin. This shift benefits the ton-mile demand.
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Suezmax routes
• According to Poten and Partners, Suezmax
activity in the Pacific has increased. Movements
from Mexico to the Far East and Kozmino to
Asia increased. According to IEA data, China
became Russia’s biggest oil customer at the
end of 2015. More Russian crude oil in China
benefits the tanker industry.
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Aframax routes
• According to Poten and Partners, the situation in the
Aframax market is less positive for crude tankers as
compared to large vessels like VLCCs and Suezmaxs. The
main Aframax market, the Caribbean market, saw fewer
fixtures, as less crude oil was moved on short haul
routes to the US and Europe. A bright spot for Aframax
could be the growing crude oil exports from the US.
smaller tankers will benefit more with US oil exports.
•
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Why India Is Becoming More Important for the Tanker
Industry
• China’s importance in the tanker industry is well known,
as it’s the second-largest importer of crude oil and also
one of the highest consumers of oil. China’s oil imports
were a key factor in 2015’s spectacular crude tanker
performance. Along with China, India will also assume a
great deal of importance in the industry in the coming
years. India also has a lot of potential to boost oil
demand growth as well as shipping growth. India
currently is the third-largest importer of oil after the US
and China.
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• India’s oil demand outlook
• According to the IEA, the Indian demand outlook is “favorable.” The IEA forecasts
demand growth to be 1.1 million barrels per day, or a 4.2% annual increase, through
2021. According to a report by Poten and Partners, India’s development is similar to
China’s development when the country was growing by 7.8% between 2000 and 2005. If
India grows at this rate, it will boost both oil and shipping markets.
• India’s oil product demand
• In 2015, India’s demand for oil products grew more than 9%, and its gasoline demand
grew by a whopping 16%. Barclays expects strong gasoline demand growth in 2016,
driven by growth in passenger vehicle sales, expanding road networks, and rising income
levels. Higher product demand increases refineries’ demand for crude oil.
• India’s oil sources
• India traditionally imported crude oil from the Middle East. However, in recent years,
India is diversifying its suppliers and has increased its imports from West Africa and
Venezuela. These ports are farther from India, and a longer distance increases the ton-
mile demand. The higher ton-mile demand benefits crude tankers like Frontline (FRO),
Teekay Tankers (TNK), Tsakos Energy Navigation (TNP), Nordic American Tankers (NAT),
DHT Holdings (DHT), and Euronav (EURN). After the lifting of nuclear sanctions against
Iran, India has also increased its imports from the country.
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Definition of Worldscale
• In the tanker segment of shipping, nearly all trip-chartering is done on the basis of the
freight-rate system Worldscale (W), which is a method of calculation of payment for
the transport of oil by ships, for a single or several consecutive voyages. Worldscale is
a table giving the amount of dollars per ton oil for each of a number of standard
routes. The rates listed in the table - the so called flat rates - are termed Worldscale
100 (W100). Large tankers need a lower W than smaller vessels to make a profit. The
flat rate is the rate per ton which gives a standard vessel (at present a 75,000 dwt.
tanker) earnings of USD 12,000 per day on a T/C-basis for the stipulated voyage. If
the flat rate is USD 10.- per metric ton, the rate level at W50 will be 50 per cent of the
base rate at W100, i.e. USD 5.00 per ton. The flat rate W100 should make a profit for
the "standard vessel", regardless of the voyage for which the ship is chartered.
Worldscale is revised annually, and the calculations include both fixed and variable
expenses. The purpose of the Worldscale is to enable both owner and charterer to
compare easily the returns on alternative voyages.
•
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• Worldscale is a unified system of establishing payment of freight rate for a
given oil tanker's cargo. Worldscale was established in November 1952
by London Tanker Brokers’ Panel on the request of British Petroleum and Shell
as an average total cost of shipping oil from one port to another by ship. A large
table was created as result.
• The same scale is used today, although it was merged with the American Tanker
Rate Schedule (ATRS) in 1969. By 2002, the table included the average cost of
320,000 voyages in permutations of from one load and one discharge port to five
loads and ten discharge ports. Worldscale is produced by Worldscale Association
(NYC) Inc. for the Americas and by Worldscale Association (London) Ltd. for the
rest of the world. The freight for a given ship and voyage is normally expressed
in a percentage of the published rate and is supposed to reflect the freight
market demand at the time of fixing.
• Following are some samples.
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Following are some samples.
In negotiating a price to pay, the above table is referred to as WS100 or 100% of Worldscale.
The actual price negotiated between shipowner and
charterer can range from 1% to 1000% and is referred to respectively as WS1 to WS1000,
depending on how much loss the first is
willing to take on that voyage and how much the latter is willing to pay.
From Yokohama to: US$/tonne Miles
Adelaide 10.60 10,574
Aden 12.39 13,038
Chiba 2.90 50
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WORLDSCALE
New Worldwide Tanker Nominal
Freight Scale
Structure and Uses
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Introduction
• Standard cost for carrying oil between ports on standard
vessel to standard formula
• NOMINAL basis to standardise format and application
• Incorporates all costs, directly where possible
• Otherwise by Fixed or Variable Differentials or Charterers’
Account
• Clear instructions as to basis
• Neutral to market, run by non-profit, non-shareholding,
middle-man structures
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Freight Scales - History
• Concept of freight schedules is more than 60
years old
• Originated in WW2 by UK and US governments
• Abiding principal is that Owners should receive
the same net daily revenue irrespective of
voyage performed
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Structure of Worldscale
• Based around nominal trading voyages of a
notional standard vessel.
• Definitions of terms used, assumptions made
and any specific applications.
• Calculations based on the costs involved in the
Standard Vessel performing a round voyage on
the target voyage.
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Structure of Worldscale
• Structured to give the same net daily returns
for the standard vessel regardless of voyage
performed at 100% of the nominal freight rate.
• Produced by two non-profit making
organisations ensuring independence from
external bias and narrow market views.
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WORLDSCALE – Basics 1
• Constitutes an Index of Reference Rates with
common calculation factors
• Expressed in USD per Tonne of Cargo Carried
• Updated in January each year for changes to
bunker prices, port charges and exchange rates
• Worldscale book contains 50,000 rates and
web-site has over 300,000 rates
• Further rates available from the Associations
• Available on annual subscription basis only
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WORLDSCALE – Basics 2
• Amendments published when significant changes occur to
port charges and are effective from a specified date
• Actual market rates are expressed as a percentage of the
published rates by common agreement of users
• Market rates are determined by negotiation between the
owner and charterer
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Why use a freight scale?
•• Standardised
Standard format
of Reference
• Ease of conducting business
• Market Index System
• Geographical options included
•• Common Understanding
Applies to different cargo types of terminology
•• Financial risk
Faster response reduction
to quotations
• Freight invoicing simplified
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Reasons to use - Physical
• Standard reference system
• Provides market index system
• Freight payment mechanism
• Negotiating tool
• Settlement tool
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Reasons to use - Other
• Statistical - Market Analysis
- Comparative Trends
• Fiscal - AFRA Output
- Transfer Pricing
- Contract Pricing
• Freight Futures – Settlement Rates
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Subscribers to Worldscale
2010 2011 2012 2013 2014
London 722 727 728 722 691*
New 181 182 175 173 165*
York
Includes: Owners, Charterers, Traders, Oil
Companies, Government departments, Banks,
Futures traders, Lawyers, P&I companies, etc, etc
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Market Penetration – Spot Fixtures
2010 2011 2012 2013 2014
Non 2241 2462 2844 2777 862*
WS
WS 11405 12234 13017 13962 3929*
% WS 84 83 82 83 82*
Source: Clarkson Research
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ECA Bunkers – Current Basis
• Reflect additional cost of Low Sulphur/Gasoil in
ECAs
• Cost calculated as a per mile value for each
mile steamed in an ECA (Laden & Ballast)
• Miles steamed negotiable and includes laden
and ballast miles.
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ECA Bunkers - Options
• Nothing in Scale – fully negotiable
• Change base fuel to MGO if enough usage worldwide –
not sufficient coverage currently
• Uplift in flat rates based on ECA mileages – not currently
technically feasible in software system – potential
upgrade planned for 2016
• Fixed Differential System to cover actual usage at local
bunker rates – allows possibility of change if rapid price
change on introduction of new ECA zones – current option
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Bunker Prices - General
• Current system adopted in revamp of scale in 1980’s to increase
transparency in relation to bunker prices
• Requested by INTERTANKO, amongst others
• Replaced opaque system of average price per voyage of 50% of
regional prices at first load and first discharge ports on voyage
• Partially solved time lag of data gathering when biannual
publication as data used was for two periods prior to current one
• Single price published in the Schedule to allow negotiations
regarding price changes for current voyages
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Drawbacks due to the loss of Worldscale
• No Standardised
Standard of Reference
format
• Ease
No Market
of conducting
Index System
business reduced
• Geographical
Common Understanding
options unspecified
of terminology lost
• Different risk
Financial approach
increased
for different cargo types
• Speed of
Freight invoicing
response less
to simple
quotations reduced
• Market monitoring less transparent
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The Tanker Shipping Market
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The Tanker Shipping Market
• The supply of tanker shipping operates under perfect competition is
characterized by several conditions.
• The first feature is number of shipping service providers. There are a number of
ship owners that own tankers that provide identical shipping services.
• The second characteristic is the availability of information. In the tanker market,
information on freight rate can be searched via such means as the Baltic Index.
Hence, shipping service providers are unable to manipulate the price. Obstacles
to entry to and exit from the industry exist but these challenges can be
managed. Entry barriers, such as government regulations, economic factors, and
marketing condition, are not present in the tank shipping industry.
• On the one hand, huge capital investment is needed to acquire ships (new ships
from the new building market or second-hand ships from the sales and purchase
market) to enter the industry. On the other hand, shipping firms may withdraw
from the market by selling their assets (i.e., ships) in the second-hand vessel
sale and purchase market
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• Tanker shipping industry comprises four different but closely associated
markets. Sea transport services are dealt in the freight market, new
ships are ordered and built in the new building market, used ships are
traded in the sale and purchase market, and old or obsolete ships are
scrapped in the demolition market.
• These four shipping markets can be categorized into real market and
auxiliary markets.
• Shipping firms order new ships in the new building market and scrap
unused ships in the demolition market. New building and scrapping
markets are real market as their activities affect the overall shipping
activities.
• The auxiliary market consists of the freight market 14 2 The Tanker
Shipping Market trades sea transport services and the sale and
purchase market trades second-hand vessels. These two markets are
categorized as auxiliary market as their transactions do not change
existing shipping capacity.
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• Freight rate is an important indicator for shipping firms to conduct
their business. When the volume of seaborne trade goes up,
demand for sea transport services will rise. The excessive demand
for shipping services will lead to the upward trend of freight rate.
Freight rate also affects the decision of tanker shipping firms to
adjust their fleet size and hence increase their supply in the tanker
market. High freight rate stimulates growth in world fleet
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Tanker New builds
• Based on the delivery schedule of the current orderbook, deliveries of new tankers in 2017 will
reach the highest level since 2009.
• While, it is difficult to see how the market can absorb such a large orderbook without further
pressure on tanker rates and prices, there may be some mitigating factors to consider.
• The Suezmaxes stand out on the crude tanker side, and if all Suezmaxes that are scheduled for
delivery this year leave the shipyards on time, a total of 10.1 million dwt would be added to the
fleet, well above the 2009 record of 7.1 million dwt, and two and a half times total 2016
deliveries.
• The recent high-water mark for VLCCs was 2011, when 65 new units of 20.1 million dwt hit the
water. This year, the yards are scheduled to deliver 15.9 million dwt, while Aframax and LR2
deliveries in this year would reach 9.4 million dwt in total. Deliveries for the Panamax/LR1
segment are expected to stand at 2.4 million dwt in 2017.
• In the smaller product carrier segments, the orderbook for delivery in 2017 is more moderate,
compared to earlier years.
• A total of 77 MRs are scheduled to join the fleet in 2017, while the Handysize vessels seems to
have fallen out of favor as only 18 are expected to be delivered during the year.
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Tanker Deliveries vs. Scrapping Potential
• Given the orderbook, the tanker market is expected to experience ample supply growth in the coming years while
the forecasts for tanker demand growth are rather subdued.
• In recent years, tanker sales for scrap have been “few and far between,” while the average age of tankers that
are sold for demolition is well above 20 years.
• Under the scenario of fixed scrapping age of 20 years, the orderbook for most segments well exceeds scrapping
over the next two years, through the end of 2018.
• The segments that appear the most worrisome are the VLCCs and Suezmaxes. Even under this scrapping
scenario, the scheduled deliveries in these segments are almost double the demolition numbers.
• The numbers for the large product tankers, LR1 and LR2, don’t look encouraging either, Poten & Partners said.
The Aframax crude tanker fleet will likely stop growing in the next few years, while the dirty Panamax segment is
already shrinking as owners opt to build coated vessels to give themselves more trading flexibility and take
advantage of the growth in long haul product movements.
• For MR and Handysize product tankers, the numbers look more encouraging, although a 20-year scrapping age is
quite optimistic for these vessels, as smaller product carriers typically trade well beyond 25 years of age.
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http://teekay.com/investors/teekay-tankers-ltd/
market-insights
/
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Pre & Post fixture
• Checking the recapitulation of terms and informing master,
• Checking voyage orders and informing master
• Performance monitoring under terms of charter-party,
• Laytime calculations,
• Off-hire calculations,
• Voyage calculation follow-up and demurrage claims,
• Calculate and invoice charters for payment of freight on behalf of principals,
• Claims handling,
• Assisting owners and brokers with information to conclude fixtures,
• Appointing agents and handling disbursements,
• Checking pro-forma D/A and arranging advance payment,
• Checking and settlement of D/A,
• Evaluating and nominating bunker suppliers,
• Keeping track of vessel? ROB and checking figures,
• Checking bunker invoices and remitting in due course.
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