Politics, ‘dirty’ politics of oil, and shipping

On February 7^th, 2012, business journalist Joe Nocera published in the Op-Ed pages of The New York Times an opinion piece titled “Poisoned Politics of Keystone XL”.  The argument moves along the lines that basically given the Obama administration’s failure to approve the Keystone XL pipeline (a politically and environmentally charged decision in an election year), the Canadian government has been actively seeking alternative buyers for the oil extracted from their tar sands, and namely seeking actively buyers in China through a recent trade mission headed by the Canadian Prime Minister. 

The Keystone XL pipeline was supposed to pour oil from Alberta, Canada, to the US Gulf where it could be processed and consumed in the US.  The pipeline project was rejected on concerns about its impact per se on the environment, but also it seems it was rejected under an orchestrated effort by environmental groups, like the Sierra Club, that perceive oil from tar sands to be so energy-demanding and environment-polluting in its production as to intend to choke its production (and sale) at any point of the chain from investment to production to consumption.

As apolitical as the Captain wishes to be, he could not resist elaborating further on the impact political decisions can have on the maritime industry.  Canada is an extremely stable country and a staunch US ally, and they traditionally sell most of their mineral resources to the US.  No doubt, it great makes economic sense; as long as you are not in international flag shipping, of course! (It’s good for the Great Lakes shipping, though!) Oil from Alberta could be transported via continental pipeline, very economically once the pipeline was installed, to the Gulf of Mexico without ever touching a tanker.  Feel bad for the poor independent tanker owners!

Enter now to the picture a political/environmental variable, and all of a sudden, there is a new equation with new set of unknowns.  If Chinese prove to be the buyers for the oil from the Canadian tar sands, obviously tankers will be involved in transporting oil from the west coast of the North American Continent to China.  Obviously, it’s great news for shipping and the tanker owners.  Almost like by divine doctrine a new market/trade automatically is created and ton-mile definitely goes up.  It’s still premature to figure out what type of tankers will be benefit from such trade, but the Captain may hazard to guess that oil could be transported from Middle East to west coast US / Far East with VLCC or suezmax tankers, which then would proceed in ballast condition to Canada to load oil from tar sands for China discharge and then proceed in ballast to Middle East to load anew. Clearly such cycle reduces the ‘ballast leg’ of the trip to less than 40%. 

Again, it’s still very premature to perceive the above scenario as a catalyst or remotely a panacea for the current slump in the tanker markets.  For instance, the pipeline may still be approved next year once presidential elections in the US are out of the picture after November 2012.  The point the Captain wishes to emphasize is that in shipping, with its extreme volatility, often variables and shocks outside the industry can make a great difference.  After all, all can model a predictable trade and the tonnage required when all is moving along like a Swiss clock.  But when there are shifts due to political concerns, environmental considerations, geo-political events, changes in public opinion and societal trends, sovereign and governmental reshufflings, etc, then there can be a game changer!   For shipping, as international and crucial as it is an industry, it is but another cog on the tableau of international trade and re-allocation of power.

© Basil M Karatzas, 2011-2013.  No parts of this blog can be reproduced in any way by any means and under any circumstances without the prior written approval of the owner of the blog.  Copyright strictly enforced.

This blog is intended only for entertainment and discussion purposes; no responsibility can be assumed for taking or failing to take any action upon information contained in any part of this blog.

Should you desire to discuss the content of the blog or obtain commercial advise or opinion, please feel free to contact us at info@bmkaratzas.com.

To scrap or not to scrap: much ado about nothing

As anyone in shipping knows, the present anemic freight markets can generally be attributed to tonnage oversupply; unlike previous downcycles when generally world trade had collapsed, in the present downcycle, despite the overall worldwide malaise, world trade has been growing – albeit, it does not seem to grow fast enough to absorb all the new deliveries of vessels, vessels that were ordered when credit was as cheap, easy and loose as lifelong ‘commitments’ during some exotic port calls in the Captain’s career. 

Since vessels on order seem to keep getting delivered, with some ‘slippage’ or despite a few cancellations, a lot of hope has been placed that an accelerated demolition schedule will bring salvation in helping balance the market.  Tonnage demand and trading patterns are what they are and cannot change fundamentally on short notice; cancelling newbuildings is much more complicated than one would expect, and generally, as multi-partite agreements, more burdensomely negotiated than the unilateral decision of a shipowner to sell a vessel for scrap.

In 2011, despite the fact that tanker freight rates had been worse than in 2010 and beastly ugly overall, only 170 tankers (about 10.5 million dwt) were scrapped versus 280 tankers (14.75 million deadweight) in 2010. Thus, overall scrapping activity has not been as high as one might expect, or to a degree of compensating for the newbuilding deliveries.

However, a lot of analysis and interpretation has gone into the recent sale by MOL of three mid-nineties built double hull VLCCs for demolition.  Another similar vintage VLCC from NYK was withdrawn from the market by way of ‘cold layup’. Thus, excitement has been building up that the time has come for even good, double hull vessels to exit the market and thus bring soon a tonnage equilibrium. 

As much hope as such an omen purports to, probably it is still premature to call for the massive demolition of vessels of about fifteen years old, just because of the above examples.  In the Captain’s opinion, it will take a much more sustained weak freight market, several many more months of below operating breakeven freight rates, before a larger number of shipowners start considering such an option.

Vessels are usually engineered with an approximate design life of twenty-five years.  It seems that freight rates have the greatest impact than any other factor in determining when vessels are getting scrapped; until a few years ago, tankers were scrapped at an average age of 26-27 years and dry bulk vessels closer to thirty years, when freight rates were going through the roof.  However, to expect that suddenly the average age for scrapping will drop between 15-20 years, just because of the examples above, is an ambitious goal, at least for now.  As painful as a weak freight market can be, it’s even more painful for an owner to sell the vessel for scrap; once the vessel is sold for scrap, the opportunity cost is that any improvement in the freight markets will be a thankless turn in fortunes. 

Taking a closer look at these tanker demolitions, MOL sold the vessels for scrap primarily because they are a huge conglomerate, unlike most shipowners, with a long term view of the markets, and could afford to make such a decision.  Further to it, based on the Captain’s direct understanding, MOL opted to sell the vessels at a lower price for scrapping than to sell them at a small premium above scrap in the second hand market where would have ended trading in the market and competing with the remaining MOL tonnage.  One has to admire and respect an owner like MOL where they decided to forego additional cash in exchange for contributing to a more balanced market.  Once again, only big owners and conglomerates with long view of the market have taken such action that helps the market.  It will be difficult seeing many independent owners acting as altruistically for now, unless freight rates decline even further and remain depressed for several more months.

There were a few more relatively young tankers that were scrapped in 2011 (before their fourth special survey - twenty years of age), but the great majority of them were vessels owned by financial owners, or publicly traded companies who had outsourced the technical management and maintenance of their vessels to third parties, and such vessels were uncompetitively expensive to be dry-docked (due to poor prior maintenance). 

Thus, the news for the sale for accelerated demolition of newer tanker vessels might have been exaggerated, since either big conglomerate shipowners or financial (and quasi-financial) owners so far have been opting of selling such newer vessels for scrap.  As hopeful and ‘altruistic’ as that the demolition of newer tonnage sounds, likely it still will take a prolonged weak freight market before independent shipowners start taking collective action.

© Basil M Karatzas, 2011-2012.  No parts of this blog can be reproduced in any way by any means and under any circumstances without the prior written approval of the owner of the blog.  Copyright strictly enforced.

This blog is intended only for entertainment and discussion purposes; no responsibility can be assumed for taking or failing to take any action upon information contained in any part of this blog.

Should you desire to discuss the content of the blog or obtain commercial advise or opinion, please feel free to contact us at info@bmkaratzas.com.