ECONOMY

Tanker prices diverge from rates

Historically, tankers’ prices and average chartering rates coincide. All forecasts of ship prices are determined by the level of freight rates, but not the other way around. Shipowners have as an incentive the satisfactory returns for ordering or buying a ship. Market prices for tankers are therefore affected by the levels of the freight rate market and their forecast. Yet the picture is not as simple as it seems. The renewal of the fleet may influence the decisions of shipowners for purchases at even higher levels than what analysts recommend or forecast as a future development, while from the side of shipyards the cost of materials is a basis of negotiations for committing to building a ship. That relationship remained quite clear until 2004, but since then a certain divergence has emerged. In the case of tankers, and particularly very large crude carriers, average revenues have posted a decline since 2004, while their prices have continued on an upward track. The average price of a VLCC in 2006 was $127 million, up from $77 million in 2003, a rise of 65 percent. First-half prices this year continued their rise by 8 percent for all types of tankers, while in the first seven months of the year the average rates of VLCC voyages (Arabian Gulf – West / Arabian Gulf – East) declined by 16 percent from the same period in 2006 (with the annual W/S difference factored in). With tanker prices still rising and rates falling (or staying put) the differential is growing, especially if we take into account the rise in fuel prices after 2004, the attractiveness of investing in tankers, and particularly in VLCCs, is considerably diminished. The historic record average of VLCC rates is estimated at $40,500 per day, although the average return of a VLCC (Arabian Gulf – Middle East) reached $31,500 per day in 2007, creating losses in this hypothetical scenario. Another interesting point based on average revenues and current shipbuilding prices is that investing in VLCCs comes last in preferences with a return of 5.8 percent of the capital invested, while last year the return came to 6.45 percent due to their comparatively lower price. Suezmax, Aframax and Panamax tankers are now the best investment in terms of return, now up to 11.3 percent, with the 10-year-old MR excepted, as their return is very high.