Expansion of shipowners’ fleets will drive profits down

The expansion of the global fleet with the addition of newly built ships is set to bring shipping profits down in 2006, according to US bank Citigroup, which titles its relevant report «Sailing in Unchartered Waters.» «We believe that 2006 will be the last year of profits for tankers as we expect that in 2007 freight rates will fall below the cycle’s average,» Citigroup suggests. The amount of capacity in proportion to chartering will increase more than 6 percent both in tankers and in dry bulk vessels as a result of both the impressive orders and the lack of ships sent for scrapping. Although international trade keeps expanding, Citigroup expects less demand for maritime transport in 2006 as it sees no significant rise in oil exports from OPEC countries, which concerns tankers, while slower global economic development will negatively affect the dry cargo market. Last year was the first of the current cycle in which the shipping market has shown a drop in earnings. «We expect a further decline in average chartering rates by 30 to 40 percent within 2006, while prices of assets (i.e. ships) will have to continue to slide due to the lower returns on investments, according to the bank’s analyst John Kartsonas, who adds that this will have a negative impact on the stock of listed shipping companies. He also believes that the decline in rates will continue into the first half of 2007. In the long term, he explains, the preference by shipyards for the construction of tankers or bulkers against other types of vessels will constitute a key factor in the future balance of supply and demand in chartering and therefore in the progress of the shipping business cycle. As another amazing year for shipping has just gone, Kartsonas wonders whether a corrective swing has taken place in the sector that will allow shipowners to maintain their pricing power by surpassing the fundamental powers of supply and demand. «The recent sales of used ships at historically high prices leave us with many questions, as it is hard to believe that the market expects the picture to improve in terms of fundamental figures just when orders for new ships are almost at 25 percent of the existing fleet,» says Kartsonas and notes that stock markets do not seem to sail along accordingly since the Bloomberg index for tankers declined by about 5 percent in 2005 due to a drop in chartering rates and in earnings compared to the year before. Kartsonas further observes that the big premiums in relation to the net asset value (NAV) with which shipping stocks played in 2004 have now vanished. In some cases there even is a discount on NAV which reflects, he says, the expectations of the market for a further drop in ships’ prices. Nevertheless, notes the Citigroup analyst, last year had two significant developments regarding the status of shipping companies on stock markets. The first was the large number of shipping firm listings with a public offering and the view among investors that shipping is an important stock domain which has cash flow and the depth to stay on the investors’ monitors even in a downward phase. The second was that investors seem to have changed their attitudes to shipping, as stock prices in the sector proved more resistant than the drop in earnings would suggest. In other words, the price per earnings (P/E) ratio has increased, and is beginning to correlate with other sections of the energy market. More tankers Kartsonas expects the tanker fleet to swell by a total of 59 million dead weight tons (dwt) in 2006 and 2007, while the scrapyards will receive ships with a combined capacity of only 11 million dwt in the next couple of years. The greatest increase in ships will be in oil-product carrying vessels, as opposed to crude oil tankers. For 2006 alone, the rise in capacity will reach 6.5 percent. In comparison, demand will only rise by 1.6 percent. Therefore the impact on prices will be significant, Citigroup suggests. It expects the VLCC category, of very large crude-oil tankers, to see its freight rates drop from $64,337 in 2005 to $42,000 in 2006 and to $29,000 in 2007. In the Suezmax category, it foresees a decline from $52,060 in 2005 to $30,000 and $23,000 in 2006 and 2007 respectively and the Aframax category to fall from $41,146 last year to $24,000 this year and $19,000 next year. Finally, Panamax rates will go down from $38,370 in 2005 to $20,000 in 2006 and $17,000 in 2007. Those rates for 2006 are much more pessimistic than those given by the time charter market and the forward rate market as well as those of most market analysts. Yet the Citigroup report does note that its rates are higher than the historic average of the 15-year cycle. True, Citigroup’s forecasts proved correct at the end of 2004 for daily rates of VLCCs (just 1 percent off the Citigroup forecast), while in the Suezmax and Aframax categories, rates went 29 and 35 percent higher, respectively, than the bank’s estimates. Forecasts for bulk carriers are similar, as ships of a total capacity of 56 million dwt are expected to join the global fleet in 2006 and 2007. No more than 7.5 million dwt will be the combined capacity of the ships to be scrapped in the same period. The annual rise in capacity is forecast at 6 percent and that of demand at 3.1 percent. Citigroup expects the drop in rates to reach 30 to 40 percent in dry bulk ships, too. Having explained these predictions, the Citigroup analyst warned that «charterers will try to recoup the huge sums they wasted in previous years in order to secure the shipment of their products.»

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