March 9 (Bloomberg) -- Supertanker owners are coping with the second-highest fuel costs on record by sailing ships at the slowest speeds in at least three years, reducing vessel supply and bolstering charter rates.
The carriers, each bigger than the Chrysler Building, moved at an average of 10.7 knots last month, about a knot slower than a year ago, according to data compiled by Bloomberg. The drop cuts the fleet’s capacity by 9 percent, according to Pareto Securities AS, an Oslo-based investment bank. Frontline Ltd., A.P. Moeller-Maersk A/S, Overseas Shipholding Group Inc. and Euronav NV, which control 16 percent of all supertankers, told investors in recent weeks they are cutting speeds.
The combination of what the industry calls ultra-slow steaming and violence in Libya, Africa’s third-biggest oil producer, more than doubled daily returns for owners to $32,089 since the end of February, according to the London-based Baltic Exchange, which assesses more than 50 maritime routes. Traders of forward freight agreements, used to bet on or hedge shipping costs, anticipate the gains will last, with second-quarter contracts at $28,894.
“Whoever says it’s not positive is on the wrong side of the trade,” said Doug Mavrinac, the analyst at Jefferies & Co. in Houston who correctly predicted a rally in charter costs in 2009. “When ships are going slow you need additional ships. It does essentially absorb excess fleet capacity.”
Fuel prices more than doubled in the past two years and surged 16 percent in six weeks as fighting in Libya disrupted oil supplies. The extra costs diminish returns for an industry already facing an estimated 6.8 percent gain in fleet capacity this year, compared with a 2.2 percent increase in demand, according to Clarkson Plc, the world’s biggest shipbroker.
An empty supertanker burns about 90 metric tons of fuel, known as bunkers, a day when traveling at 14 knots, according to Riverlake Shipping SA, a broker in Geneva. Hamilton, Bermuda-based Frontline, the world’s biggest supertanker operator, can cut that to about 25 tons when sailing at 10 knots on the empty leg of a journey, said Jens Martin Jensen, chief executive officer of the company’s management unit in Singapore. That means saving about $42,000 a day at the global average price.
“If I was a ship owner, I would be bending over backwards to operate at the slowest speed I could get away with,” said Martin Stopford, the London-based managing director of Clarkson’s research unit. “With today’s bunker prices, slowing down is going to be very high on their agenda.”
Forward freight agreements on the industry’s benchmark Saudi Arabia-to-Japan route gained because of the prospect of slower speeds and the possibility the Middle East nation will ship more oil to replace Libyan barrels, said Will Leslie, head of tanker derivatives at broker ACM-GFI in London.
Fuel cost 61 percent of rental income on the Persian Gulf-to-Japan route since the start of the year, heading for the second-highest quarterly average since Bloomberg began compiling the data in 2002. The average over nine years is about 35 percent, the data show.
The incentive to slow down the fleet of 537 vessels is the greatest since the late 1980s, when charter rates had plunged and fuel costs surged, said Mark Jenkins, the London-based director of research at Simpson, Spence & Young Ltd., the world’s second-largest shipbroker.
Owners are mostly decelerating on the so-called ballasting leg of journeys, when they’re sailing empty, said Martin Korsvold, a Pareto analyst. Now shipping lines are seeking accords to do the same when vessels are full, he said.
The slowdown doesn’t mean fewer deliveries. There are about 10 percent more supertankers available in the Persian Gulf region than estimated cargoes, according to Bloomberg’s weekly survey of brokers and owners. Nor does it mean a slowing global economy. World oil demand will expand 1.7 percent this year, the Paris-based International Energy Agency estimates.
As the cost of cargoes rises, so does the fuel to ship it. Crude was at $105.21 a barrel on the New York Mercantile Exchange by 11:15 a.m. local time, from $84.32 on Feb. 15. No monthly contract on the bourse through December 2019 costs less than $100.
Crude output is lower in Libya and there have been riots in Bahrain, Oman and Yemen, all neighbors of Saudi Arabia, the second-biggest producer behind Russia.
Owners reduce their fuel bills “exponentially” by slowing and they need to spend about $100,000 modifying each engine to do so, said Hugo de Stoop, chief financial officer of Antwerp, Belgium-based Euronav. The company’s vessels, each capable of carrying about 2 million barrels of oil, are part of the world’s biggest pool of supertankers, operated by Tankers International. Overseas Shipholding is also a member.
Ship owners are seeking alternatives to cut fuel bills. Akzo Nobel NV, the world’s biggest paintmaker, said last month that it developed a hull coating that can cut a supertanker’s fuel consumption by more than 10 percent. The paint is being used on more than 400 ships in the global fleet of 70,000, said John Wilshire, marine manager at International Paint, the Akzo Nobel unit that sells the product.
The industry is also considering alternative energy sources. Liquefied natural gas will become the dominant merchant fleet fuel within 40 years because of tighter emissions laws, according to Det Norsk Veritas, a Hoevik, Norway-based company that inspects and classifies ships.
Nuclear power may be used to propel 10 percent of merchant vessels within 15 years, Lloyd’s Register, a London-based ship classifier, said in November. The carriers would need refueling about every five to seven years.
SkySails GmbH & Co., a Hamburg-based company, created a sailing system for ships that can cut fuel use by as much as 35 percent. The 320 square meter (3,400 square foot) kite, already being used on four vessels, will be deployed on the largest ship so far next year, a carrier with a capacity of about 30,000 deadweight tons. Supertankers are about 10 times bigger.
Cutting speeds may curb or eliminate losses in a market where returns for shipowners in the spot, or single voyage, market today rose above the $30,100 a day Frontline says it needs to break even on each of its supertankers for the first time since Feb. 21. Carriers also hire out vessels at fixed rates for longer periods.
Frontline will report a profit of 0.1 cent a share for this quarter, compared with a loss of 15 cents in the final three months of 2010, based on the mean of nine analyst estimates compiled by Bloomberg. Overseas Shipholding will narrow its first-quarter loss to $1.46 a share from $1.83 a share in the previous three months, the mean of seven estimates shows.
The six-member Bloomberg Tanker Index rose 0.3 percent this year, compared with a 4.6 percent advance in the Standard & Poor’s 500 Index.
“We haven’t lived in this sort of high bunker price world for an extended period of time ever,” Morten Arntzen, chief executive officer of New York-based Overseas Shipholding, said on a conference call Feb. 28. “People are now experimenting with lower speeds and realizing that it works and not only does it work, it puts money in their pocket.”
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