Future Trends in the Global Bunker Market Will Bathurst, Senior Analyst SSY Consultancy & Research Bunker Asia Forum Singapore, 7th Whilst care and attention has been taken to ensure that the information contained is accurate, it is supplied without guarantee. SSY Consultancy & Research can accept no responsibility for any errors or omissions or consequences arising therefrom.
Summary The Freight market environment Dry bulk market review & outlook Tanker market review & outlook The bunker component of spot freight rates Slow steaming as a cost saver Impact of legislation/standardisation on bunker costs
Dry Bulk & Tanker Markets review and outlook
Baltic Dry Index what s the issue, lower levels have been seen before? Source: Baltic Exchange 1985-2003 average: 1,289 Sept 5 2011: 1,750
The problem more expensive finance (example: dry bulk Panamaxes) Source: SSY
Baltic index average timecharter rates 100,000 90,000 80,000 70,000 60,000 Source: Baltic Exchange Cape 172kdwt Panamax 74kdwt Supramax 52kdwt Handysize 28kdwt $/day 50,000 40,000 30,000 20,000 10,000 0 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11
the dry bulk market story in 2011 trade volumes shaped by export cargo availability coal from Queensland & iron ore from Australia & Brazil India iron ore export ban, monsoon & further restrictions? Japanese earthquake followed by recovery in cargo supply rapid growth in fleet supply record newbuilding deliveries swamp higher scrapping
average dry bulk carrier spot market earnings ($/day) Jan-Aug 11 Jan-Aug 10 Chg (%) Handysize 10,793 17,819-39% Supramax 14,220 24,578-43% Panamax 13,814 27,655-50% Capesize 9,575 32,425-70%
bulk carrier fleet supply growth: annual average percentage change Base Case for 2011/12: 30-35% postponement/cancellation from newbuilding orderbook and limited further orders for 2012 Record deletions (50+ Mdwt) Requires trade growth in 2011/12 of over 800 Mt
However world GDP & dry bulk trade growth points to slower bulk growth Annual chg million tonnes 320 280 240 200 160 120 80 40 0-40 -80 Annual Chg Total Seaborne Dry Bulk Trade GDP growth Bulk growth of 450-75 Mt 6 5 4 3 2 1 0-1 2 0-1 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source:SSY, IMF % annual chg (GDP)
three key pre-conditions for recovery major expansion in coal & iron ore export capacity approx 1 billion tonnes of new annual iron ore export capacity due by 2015 record scrapping China to boost shipbreaking capacity? sharp slowdown in newbuilding deliveries Chinese policy goals new eco-designs to trigger fresh ordering?
negative risks to bulk trade rebound China import slowdown increased domestic iron ore production government slowdown measures world steel industry margins threatened fall in Japan s industrial output under-estimated European sovereign debt crisis rebound in cargo supply over-estimated delayed recovery in Queensland/further legal challenges to Indian iron ore/labour disputes
Tanker supply is dominating dirty fundamentals, but clean improving Dirty market outlook looking increasingly grim Fleet supply to overwhelm demand growth High oil prices pressuring consumption growth Crude spreads suppressing WAFR-East trade Canadian supply and global pipeline projects OECD refinery closures offset non-oecd growth Clean prospects brightening on slowing supply 40% of new refining capacity in exporting nations OECD rationalisation driving regional deficits
dirty tanker earnings languish at low levels Source: SSY
Clean LRs have benefited from storage and naphtha demand, MRs poor Source: SSY
Average tanker spot market TCEs ($/day) Jan-Aug 11 Jan-Aug 10 Chg (%) VLCC 7,807 38,125-80% Suezmax 9,554 27,525-65% Aframax 10,033 18,966-47% LR1 (MEG-Japan) 7,432 11,062-33% MR 7,193 6,673 +7%
Transport fuel remains primary driver of global oil demand; fuel oil shrinking 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5-2.0 Global Oil Product Demand By Grade, yoy Change, mbpd Other Fuel Oil LPG & Naphtha Transport Fuel 2005 2007 2009 2011F 2013F 2015F Sources: IEA, SSY
Refining overcapacity forcing shutdowns in OECD long-haul locations 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 Distillation Capacity Shutdowns Annual Removals, mbpd Other Asia Pac N Amer Europe 2009 2010 2011F 2012F 2013F 2014F 2015F 2016F Sources: SSY, IEA, EIA, BP, OPEC, Various
Refining growth in exporting countries will boost clean tanker demand, limit dirty 3.0 2.5 Net Global Distillation Capacity Additions By Crude Sourcing, mbpd Domestic Crude Importers 2.0 1.5 1.0 0.5 50 mtpa of dirty demand growth is only 3% tonne-mile growth 0.0 2005 2007 2009 2011F 2013F 2015F Sources: SSY, IEA, EIA, BP, OPEC, Various
Slippage from 2010 has exaggerated 2011 delivery schedule, but threat remains 45 40 35 30 Orderbook Existing DH Non-DH Dirty Tanker Fleet Age Profile As of 31 July 2011, dwt millions 25 20 15 10 5 0 Pre-83 1986 1990 1994 1998 2002 2006 2010 2014 Source: SSY
Single-hull removals have limited immediate demolition candidates 45 40 35 30 25 20 15 10 5 Dirty Tanker Orderbook vs. Older Tonnage As of 31 July 2011, dwt millions 20+ years 15-20 years Orderbook 0 Pana Afra Suez VLCC Source: SSY
Following high 2010 deliveries, clean orderbook drops significantly 14 12 10 Clean Product Tanker Fleet Age Profile As of 31 July 2011, dwt millions Orderbook Existing DH Non-DH 8 6 4 2 0 Pre-83 1986 1990 1994 1998 2002 2006 2010 Source: SSY
Ordering pause in 2008-09 set to provide sharp slowing in clean fleet growth 16% Product Tanker Fleet Growth yoy Percent Change, Avg Fleet Basis 14% 12% 10% 8% 6% 4% 2% 0% 1997 2000 2003 2006 2009 2012F 2015F Source: SSY
What does the future hold? Spot earnings and ffa data (Sept 5, $/day) Jan-End Aug 11 Cal 12 Chg (%) MR 7,193 9,400* +31% VLCC 7,807 11,100* +42% Panamax (dry) 13,814 11,775-15% Capesize 9,575 14,425 +51% *SSY average earnings forecast based on FFA data
The Bunker Impact
Fuel oil market facing several issues Long term demand for fuel oil expected to ease as sulphur legislation affects both bunkers and power generation Russian fuel oil exports likely to fall under new 60-66 tax regime Iranian fuel oil exports hit by sanctions, internal power demands Supplies of low sulphur already tight with demand set to grow, increasing premiums
Widening spread between diesel & fuel oil has improved economics of US cokers 80 USG Diesel Premium to Fuel Oil Weekly Data, US$/bbl 70 60 50 40 30 20 10 0 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Source: EIA
What the past shows us - Singapore 380 CST on upward trajectory 800 700 600 500 USD/t 400 300 200 100 0 Apr-99 Sep-99 Feb-00 Jul-00 Dec-00 May-01 Oct-01 Mar-02 Aug-02 Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11
The scenario facing ship owners European, American operators need minimum three types of fuel Main fuel (HSFO), ECA Fuel (1% max), MGO at berth ISO 8217 (2010) supplies all ports? when? Logistical question of purchasing Potential for new bunkering hubs to emerge to supply ECA fuels Technical problems segregation, boiler problems Sourcing of 1% and distillate fuels All of the above in a volatile market with high prices Increased demand for bunker fuel Need for investment in scrubber technology
the bunker percentage of spot freight costs Capesize RV Tubarao-Beilun 90 80 70 60 Source: SSY 14.5/15 knots 12.5 knots 50 % 40 30 20 10 0 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11
Daily main fuel burn costs Aug 2011 (assumes same consumption levels) $60,000 $50,000 14.5/15 knots 12.5 knots $40,000 USD/Day $30,000 $20,000 $10,000 $0 380 CST ISO 2010 380 CST LS 380 CST MGO Source: SSY
The effect of slow steaming on bunker consumption - Tubarao-Beilun RV $4 0,000 $3 5,000 $3 0,000 $2 5,000 14.5/15 knots 12.5 knots Two knot reduction means roughly $8,500/day fall in bunker cost USD/Day $2 0,000 $1 5,000 $1 0,000 $5,000 $0 Source: SSY Aug-11 12.5 knot voyage means five annual RVs compared to six at 14.5/15 knots
Conclusions Both bulk and tanker markets face extended period of low earnings due to fleet growth. Sheer size of orderbooks requires record scrapping and end to ordering. While owners struggle, high commodity prices mean charterers are able to meet the cost of bunkers. Currently. Bunker prices only set to increase in future pointing to increased cost of shipping even with record fleet growth suppressing earnings.
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