Click here to go back to CONCONNECT home pageTANKER ECONOMICS: FFA JANUARY 2012
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This is a SAMPLE of our analytics- please contact bdp1@conconnect.com to discuss a particular situation

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SAMPLE: Jan. 2012 Tanker Market FFAs: Dickens Would Not Like These Expectations

A peculiar structure in the forward curves for the larger (VLCC) tanker sizes was brought about by the spot tanker rally during January, where the barometer TD3 route  (AG/ Japan) averaged WS 57 (or a TCE of about $22,000/day). The sharp spike in the nearby position, caused by a mid January chartering rush in advance of Asian holidays, was counterbalanced by the dismal, outlook moving forward- an outlook that was improved compared to year end 2011. In the forward curves, the  TCE’s, imputed from WS rates,  worked back to hires in the region of $12,000/day to nearly $14,000/day out through 2013. Expectations for the traditionally strong Winter season, in 2012- 2013, show a small upward blip, to imputed TCE’s exceeding $14,000/day.  <>

Confirmation over a multi-month time span will be required, in order to properly label any truly positive change in sentiment. Such a nascent change- if real, can be seen from a comparison of month end with the beginning of January, when the Calendar 2013 Imarex assessment was WS 40, or $10,900/day. After Asian traders returned to their desks, the Calendar 2013 rate was assessed by Imarex at WS 41.8, or around $13,800/day (based on likely fuel prices). Even with the improvement, a daily hire at this level is not sustainable; operating costs alone on a VLCC are roughly $10,000/day. Daily TC breakevens of between $25,000/day and $30,000/day are derived by adding a component that reflects the capital costs, typically  $15,000/day to $20,000.day, which would be added to the tanker operating costs.

Brokers have estimated one year timecharters for modern VLCCs at around $17,000/day (one year duration) - $23,000/day (three years), indicative of hires that might be agreed by the lowest marginal cost operator, one of benefits from a low capital cost component. The Imarex computation of 2012 “calendar” hire, at $12,100/day TCE, really more of an averaging of non bids and offers reflecting cost recovery,  is at a very substantial discount to the one year TC estimate. 

 

The million barrel (Suezmax) tanker segment, in contrast, has remained steady throughout January; the end month TCE of the West Africa to Northeastern US route (TD5) saw a monthly average hire above $26,000/day, with hire equivalents tailing off to below $23,000/day, at month end. The forward curve reflects perceptions of future oversupply, much like the larger tankers. Where the period rates for a Suezmax in the physical market is approximately $16,000/day- $17,000/day, the forward rates are discounted slightly- with Calendar 2012 and 2013 finishing January with assessments working back to $15,800/day and $13,600/day. While giving more credence to FFA’s as a predictor, these are hardly great expectations. <>Two Aframax runs, TD 9 (Venezuela/ US Gulf) and TD 17 (Primorsk to Wilhelmshaven), both heavily influenced by seasonality, are now deviating from historical norms. The TD 9 rate saw the spot elevated above the forward based on winter weather and increased demand for lightering; the TD 17 run was soft, on less ice than normal in the Baltic loading areas. These impacts brought the TCE from the TD 9, with a spot equivalent of $21,000/day, above the Calendar 2013 imputed TCE of $18,700. In the highly volatile ice class run (TD 17), the opposite was the case; the depressed spot, at a month end TCE of $11,500 was below the January average of $19,000/day; it was way below the 2013 Calendar computation equating to above $23,000/day (computed using an imputation of the fuel price).   <>
 


As we are prone to do, we use graphics to illustrate concepts- the images below show vessel pictures overlayed to evoke our mindset into the minds of potential clients, who routinely ask us questions about maritime economics. These vessels pictured below are drybulk ships- but concepts certainly apply to tankers, as well. 

Maritime Financial Engineering and Deal Structuring Analysis and Presentations re Maritime and Energy Supply and Demand

OUR EMPHASIS : CASH FLOW IS KING
In shipping projects, cash flows are the most critical concern- will there be enough cash available to service debts, to maintain required reserves, to reward equity investors with returns. We work with our clients to construct and present realistic scenarios.

-EXPERT WITNESS and litigation support for lawyers (was the ship really earning $44,000 per day?). We have assisted, as expert witness, in the valuation of both assets and freight markets at particular points in time.

-Freight market analysis for investment bankers (example: what is the market contour for product tankers in offshore trades?). Such earnings scenarios can then be input into both asset and company valuations.

Barry Parker's articles on topics such as ship finance, hedging strategies, and even "residual value futures" and ways to protect ship values, have been published widely. His work has supported the closing of numerous shipping transactions, the smooth running of maritime businesses and the forensic investigation into the arcane world of cash flows for maritime companies. 

We are called upon to develop freight and energy hedging strategies (as discussed in a separate page), and engineer and reverse engineer financial packages for shipping (tanker, drybulk, container, gas carriers).  We have worked on financial modelling  in  connection with  capital raises for both public and private markets.

WHAT ABOUT FORECASTING?
Forecasting is not our main emphasis- though some of our clients are heavily into forecasting. Our approach is to develop a variety of scenarios, emphasizing the downside (which may be rising prices, it depends on your role)- that's where you can get hurt. Therefore, we take the view that protecting the downside (worst case) scenario, perhaps with hedges, or simply through a tight overall deal structure, is the way to go. Even without explicit forecasting, clients find our market insights to be worthwhile.

Fun stuff: Barry Parker article on futures trading that appeared in Fairplay Magazine in late 1987, prior to the advent of FFAs. 
Phone 1 516 606 9088 The email address is   bdp1 at conconnect dot com Now on SKYPE 
 
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