VLCC Orders Could Wreck Sector Recovery

Shipyards are offering low prices for VLCCs, encouraging orders

Very large crude carrier (VLCC) orders rose in the first quarter of 2014, creating a potential threat to recovery in the sector, Drewry reports in its latest Tanker Forecaster, according to an emailed press release.

"Attractive yard prices, expectations of faster growth in demand for large crude carriers (amid rising trade on long-haul routes) and growing interest from private equity firms in the tanker market resulted in increased ordering in 2013," said Rajesh Verma, editor of the Forecaster.

"The recent firming in freight rates in the period market also added fuel to the fire."

In 2013, 26 VLCCs were ordered, up from just 21 total in 2011 and 2012, and the upward trend gained significant momentum in early 2014, with 14 orders in the first three months.

That's up from only six orders in Q4 2013.

Changing trade patterns are increasing the need for long-haul oil transport as the U.S. becomes increasingly self-sufficient, shifting Latin American, Caribbean and West African exports to Asian markets, but Verma warned increased demand is not enough to justify big increases in orders.

"Tonnage utilisation in the VLCC market has not picked up sufficiently to accommodate any surge in ordering activity, putting the sector's recovery at risk over the coming years," said Verma.

"The recent slowdown in the Chinese economy is an additional concern for the VLCC market, as many refinery projects are being delayed or cancelled due to slowing oil demand growth in the country.

"So, owners need to be cautious."

Some analysts warn that private equity money is moving into shipping too quickly, threatening to add too much capacity to bulk and tanker markets.