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Rising bunker costs, weak market squeeze tanker earnings: trade

By Pradeep Rajan, William Bathurst & Benno Spencer

August 11 - The steady rise in the cost of bunker fuels this year has further eroded shipowners' earnings across all the segments of the tanker industry, sources said August 7.

The price of 380 CST bunker fuel in Singapore has nearly doubled since the beginning of the year, from $242.50/mt to a 2009 high of $451/mt on August 6, according to Platts data. (See related chart: Platts Singapore 380 CST (average $/mt): January 2 - August 4 2009.)

With bunker fuel prices seeing such substantial increases on the back of the the global crude market's rise back to above $70/barrel, one charterer-cum-owner in the Medium Range tanker market said that his earnings have dwindled by around 16% on the benchmark Singapore-Japan voyage, with current rates at 77.5 Worldscale points.

"Actually, the returns are negative at the current bunker rates on a round trip," the source said, adding that his best bet for positive earnings currently is to take a voyage to the Far East from Singapore and then find a back-haul cargo. (Listen to related podcast: Recent developments in the global tanker market.)

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High bunker costs are also discouraging owners from ballasting their vessels to other markets where earnings are better, sources added.

For instance, on a Singapore-Japan round voyage with a confirmed cargo on the back-haul, an owner can earn $5,000/day based on current bunker costs.

However owners will not move their vessels from elsewhere to Singapore because the ballasting cost would be in the region of $15,000-$16,000/day.

"By sitting for a day without a cargo, I would lose only $5,000/day. At this rate, I can sit for three days and wait for a cargo. [It is actually] cheaper for you to sit and wait," the source said.

The picture in the dirty market is the same.

"The market is not looking any good. A rate at w37 is not making anything. The increase in bunker costs is eating into my earnings," a source with a VLCC owner said.

The Persian Gulf VLCC rate on a voyage to the East has moved up a few notches from w30 to w37 the week ended August 7. (See related chart: Platts Persian Gulf-East VLCCs (Worldscale rate): January 2 - August 4 2009.)

On August 6, the Persian Gulf-East VLCC route was assessed at w40, which would offer an owner earnings of close to $19,000/day.

But with a new VLCC costing close to $150 million, this level would not cover costs, a source said.

"The market has touched the w40 level and the bunker [costs] are the reason. The tonnage is not tight. I think the bunkers are the only factor that is keeping the market up," a source with a Japanese oil major said.

In the Persian Gulf the price of 380 CST bunker fuel has risen from $381/mt July 10 to $448.50/mt August 6, but over the same period Worldscale rates have risen on 4 points, from w36 to w40, according to Platts data.

In the Mediterranean, Aframax rates have been prevented falling by the very high bunker costs.

A long position list and limited cargo demand has meant that owners have faced an uphill battle to pull rates higher. Instead the market has remained stuck at around the w60-65 level. (See related chart: Platts Cross Mediterranean Aframaxes (Worldcale rate): January 2 - August 4 2009.)

Since July 13, however, 380 CST prices in Gibraltar have risen from $365.50/mt to $448/mt August 5, leaving earnings at around the $5,250/day level, according to one broker. (See related chart: Platts Gibraltar 380 CST (average $/mt): January 2 - August 4 2009.)

"For Aframaxes many owners prefer to stop than fix at low levels which means losing money," said one source. "You have to consider that so few cargoes in the market means that many vessel have to stop or at least remain spot for a long time."

Credit issues

"Earnings are not good. Rates are low, although there is no product to move around you need to spend some money to survive," a bunker fuel supplier added. "Some shipowners can't get credit lines and from their is very difficult to get extra money, so you have to use your funds to survive," he continued.

Although the specific percentage is unknown, many shipowners across the world have been denied credit lines, if their credit status drops below A, sources said.

Furthermore, some shipowners have been denied credit lines purely on the relationship they have with the bunker fuel suppliers they do business with, the supplier said.

"These are very tough times for shipowners. If the depressed freight market continues and bunker prices keep firming, expect ships to lay up," the supplier concluded.

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Chart: Platts Cross Mediterranean Aframaxes (Worldcale rate): January 2 - August 4 2009

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