Analysts Say Current Bunker Prices Are Too High

The prices of bunkers have risen to levels analysts say are too high.

Industry analysts have said current bunker prices are too high relative to historical levels, Singapore based Channel News Asia reports.

"Current levels of bunker prices are still too high, relative to historical numbers," said Phillip Securities' investment analyst Derrick Heng.

"But again, industry level, you look at new orders coming in, you are seeing larger vessels, on average the top 10 largest carriers have order size that is around 2.4 times the current fleet. With larger fleet, larger vessels, you would derive economies of scale, lower your unit slow cost as well," he added.

"It is tough to maintain any significant profitability in the current situation. Probably third quarter will be a peak as far as profits are concerned," speculated DBS Vickers' analyst Suvro Sarkar.

"They may record some profits because of the higher rates earlier this year, but this will probably be the peak for now. Liners will have to increase rates by another 10 percent if they want to see profitability that they had in 2010," he added.

Ship owners and operators have, however, been focusing on more fuel efficient vessels to combat the rising bunker prices, both in terms of newbuilds and modifications to existing fleet.

Nordic American Tankers Limited (NAT) [NYSE:NAT] said last week it was making investments to its existing tanker fleet to reduce fuel consumption by approximately five tonnes of fuel per vessel per day which would yield cash savings on its bunker bills equivalent to over $3,000 per vessel per operating day.

Evergreen Line, Graig Group, Hyundai Heavy Industries Co., Ltd. (Hyundai Heavy), Canada Steamship Lines (CSL), and Swedish tanker shipping company Concordia Maritime AB (Concordia Maritime) are just some of the firms who have made headlines in the last few months for newbuild orders of fuel efficient ships.

Some analysts have noted that adding the new fuel efficient tonnage would also add to the problems of oversupply, although this may be countered by a rising number of reasonably young tonnage being scrapped.