Hop on to a ride on the supertanker

The supertanker industry is riding the crest of the biggest wave of activity it has ever seen. Fuelled by a high oil price, demand for supertankers has been overwhelming, pushing up the daily price of a very large crude carrier (VLCC) from $20,000 to $220,000 in the last year.

In this perfect storm of business, it is difficult not to make money, and UK tanker broker Braemar Seascope yesterday announced that profits before tax in the first half were up almost 54pc at £2.89m. Braemar charters tankers for oil and gas as well as dry cargoes, such as steel. The brokers also buy and sell ships on behalf of third parties.

The company said the second half will be even better. Because it deals in future charters, the group already knows roughly where profits will end up this year. It deals in dollars and has lost £700,000 due to the downward shift in the greenback, but says it has beneficial coverage for two thirds of its second-half business. The share price has risen from 220p at the end of last year to 387½p yesterday.

The tanker business has been volatile in the past, and is closely tied to oil and steel prices, but there is much to be optimistic about. Shipyards around the world are full and the supply of new tankers in the next four years will be limited.

Most buyers are looking to the second-hand market and the price of a five-year-old ship has soared to more than the cost of commissioning a new vessel. That restriction of supply will keep prices high.

The gamble is whether the freight prices will increase further during the peak winter season. The market has already priced in the prospect of a buoyant second half, but there is a possibility it could be even better than Braemar is forecasting. Day rates could hit $250,000.

There is little downside to that gamble, so the company is a buy. The shares trade off 12 times future earnings for the year and the dividend went up 20pc yesterday, giving a yield of 3.4pc.

Bulk freight brokers start to jump ship
By Alex Fak
Published: December 18 2004 02:00 | Last updated: December 18 2004 02:00

Ten days ago freight brokers seemed to be climbing over each other to get to the top of the mast. Now it appears they are jumping ship.

Since reaching an all-time high on December 6, the Baltic Dry Index, the leading benchmark of bulk freight rates (which exclude volatile oil shipments), has fallen 19 per cent.

The precipitous fall is a matter of concern, since the BDI has been known to detect underlying changes in global demand before other indicators.

"You might find that a sustained downturn in freight means producers are using existing inventories rather than importing at previous rates," says James Leake, senior analyst at the shipping brokers JE Hyde.

But that is clearly not the case this time, he adds. Producer prices are rising in the US: they have shot up from 4.4 per cent in the year to October to 5.1 per cent in November due to sustained demand. And shipping rates are still 91 per cent higher than they were in June thanks to hungry demand for steel and the raw materials used to make it.

Some indicators point to slowing growth in Organisation for Economic Co-operation and Development countries and China next year. But the latest drop in prices has nothing to do with that. It comes on the back of much more market-specific events and indicates just how volatile the shipping market can be.

The clue lies in the main driver of recent falls - the Baltic Capesize Index, which measures rates for the largest ships and which has plunged by some 40 per cent in real terms in the past two weeks.

Pierre Aury, managing director at the shipbroker Clarkson Capital, notes that there are only 650 mammoth ships sailing the oceans, making some 9,100 calls in ports during the year. Just one day lost in port during each call takes out the equivalent of 25 large ships each year. "Over the last two years, we have had average delays of more than 10 days," Mr Aury adds.

A spokesman for the Baltic Exchange says that port congestion takes out the equivalent of one third of the entire capesize fleet and is hard to combat. "Our normal way of 'getting out of jail' in shipping is to build more ships, but changing the infrastructure of the supplying ports is a longer-term and more expensive business," he says.

So, coupled with soaring demand for steel and raw materials, congestion has had a lot to do with the meteoric rises in shipping rates this year.

Prices got so high that one-off factors such as the festive season were enough to cause a market slump. Ship operators, who pay ship owners for the vessels, "would rather contract away the ship at maybe a $5,000- $10,000 discount and get it done before Christmas than have to wait until the very last hour or risk missing any business," says Mr Leake.

The average daily hire rate for the largest dry bulk carriers has dropped from $98,583 to $74,048 in the past two weeks but is still way above the $30,000 that operators were able to get just 18 months ago.

Moreover, many steelmakers, predicting higher coal and iron prices, had stocked up while still on cheaper contracts, accounting for much of the surge in prices, says Peter Norfolk, dry bulk market analyst with the brokers Simpson Spence & Young.

As large steel producers began to sign new raw material contracts - with one Japanese steelmaker, for instance, doubling the price it will pay for coking coal - spot market prices rose and discouraged some of the demand for coal and iron.

Just as that happened, rains in South America have damped production of coal, freeing up some vessels and driving prices further down.

The Baltic Exchange suspects that much of the recent drop is also due to good old market tactics. An exchange spokesman says he has noticed a surge of brokers pulling out of deals, bringing the market down in order to re-enter at lower rates.

This would be a hard thing to do on any exchange with millions of participants but quite easy in the smaller world of international shipping.

Shipping faces crisis as British ports fill up

The government must approve new container terminals this year or risk hurting trade, writes Dominic O'Connell

SHIPPING LINES using the container terminal at Southampton, one of Britain’s largest ports, received an unexpected missive from the terminal’s managers four months ago.

They had decided to impose a limit on the number of empty containers that shippers could store at the port. The huge imbalance of Britain’s trade with Asia — fuelled this year by a boom in imports from China — had left Southampton with 25,000 empty containers rather than the normal 12,000.

Fearing that the clogged terminal would be unable to cope with the normal pre-Christmas shipping rush, the port decided to restrict the number of empty containers.

Southampton’s action is a sign of the pressure on container ports in the south. Tonnages have tripled over 30 years and grown at about 5% a year for the past decade — 4.5m containers went through British ports in 2003 — but capacity to handle the cargoes has not grown at the same pace.

If new terminals are not built soon, industry experts predict that container ports in the south will rapidly become overcrowded, forcing Britain’s exports and imports to be shipped not direct to their final destination but through large ports on the Continent.

Estimates vary on when the crisis will hit, but industry leaders agree that the need for action is urgent.

David Asprey, head of shipping policy at the Chamber of Shipping, said: “If something is not done soon, it will be pretty horrible within the next couple of years. And even if planning approval is given quickly, we are still looking at a couple of sticky years while the new facilities come on stream.”

Decisive action is likely this year. The government is expected to rule by the autumn on three important container- terminal applications that are awaiting planning approval. One is at Felixstowe, already Britain’s largest container port, another is at nearby Harwich, and the third is on the Thames estuary near Thurrock in Essex.

The promoters, Hutchison Ports for the Felixstowe and Harwich schemes, and P&O for the “London Gateway” Essex site, are both confident they will get the green light.

Recent omens are not encouraging, however. Last year ministers turned down Associated British Ports’ £600m plans for a facility at Dibden Bay, near Southampton, which could have handled 2.3m containers a year. The scheme was rejected on environmental grounds.

The decision plunged some in the industry into gloom, with shipping leaders and MPs berating the government for the lack of a coherent ports policy.

But ministers promised action on the other large schemes, saying in last year’s transport white paper that they intended to make a decision this year.

The first decision is likely to be on London Gateway, a plan promoted by P&O for a £700m terminal capable of handling 3.5m containers a year. It will occupy a 1,500-acre brownfield site on the north shore of the Thames and the plans include a 712-acre business park.

Alistair Baillie, chief executive of P&O Ports, said he did not believe the Dibden Bay verdict was bad news for the scheme.

“I do not think that decision sets a precedent for the secretary of state because he looks at each proposal on its own merits, so we don’t draw any parallels from that decision to our situation,” he said.

P&O has been on tenterhooks for some time. The public inquiry into the scheme finished in September 2003, and since then there have been regular rumours of an imminent announcement from John Prescott, the deputy prime minister.

Ministers are expected to give their verdict on the proposed new terminals at Harwich and Felixstowe later in the year. Public inquiries into the schemes finished in October and December respectively, with the inspectors in each case saying they would make their recommendations by March.

The promoter of both is Hutchison Ports UK, a subsidiary of the Hong Kong- listed conglomerate Hutchison Whampoa. Hutchison intends to invest £300m at Bathside Bay in Harwich to create a terminal that can handle 1.7m containers a year. At Felixstowe South, the company would spend £250m converting former ferry wharves into a port capable of handling 1.5m containers a year.

P&O and Hutchison both say that if new capacity is not given the go-ahead, the biggest losers will be Britain’s exporters and importers. Paul Davey, a Hutchison spokesman, said: “UK industry and exporters would not have direct access to all the shipping services they need. Exports and imports would have to be shipped on longer and more expensive routes through continental ports.”

Felixstowe South is regarded as the least contentious of the three schemes because it is based on the conversion of existing port facilities.

London Gateway and Bathside Bay face more stringent tests because they have some of the same environmental considerations that in the end sank the plans for Dibden Bay. However, given that either development could, with Felixstowe South, satisfy demand in the region until the middle of the next decade, planning-industry experts believe the government will approve one, but not both.

The planning decisions on the three big container terminals could boost — or mar — a big year for Britain’s shipping industry. The government is backing SeaBritain, a celebration of our maritime heritage, which culminates in October with the commemoration of the 200th anniversary of the Battle of Trafalgar.