Leading the way; making a difference

Expanded role of the WS Committee

Sustainable tanker industry--o--

INTERTANKO Council MeetingLondon, November 14th 2012

Erik RanheimSenior Manager Research and Project Section

Leading the way; making a difference

1. New role of the WS Committee the market2. Sustainability3. Changing preconditions4. Market distortion5. Meeting the brokers

Leading the way; making a difference

New role of the WS Committee

1. Study and review Market distorting factors relating to transparency and free flow of information

2. Keep members informed about potential market distortions that may affect the sustainability of the tanker industry

3. Ensure that trade processes and tools are balanced, practicable and effective

4. Generate ideas and make recommendations where appropriate

5. Cooperate and develop a constructive dialogue with all such interested parties in the tanker

Sustainability

Leading the way; making a difference

Economics• Profit & loss• Cost saving• Terms and

conditions• Trade growth

Safety and environment • Oil pollution

• GHG emission• ANNEX VI

• Ballast water

World society/humanity• Free market and trade• Economy and welfare• Rules and regulations

• Law and politics

Sustainable

Sustainability - the balancing acts

Free competition/Fair trade

AdministeringNatural resources

Stewardship

Profitability & efficiency versus safety and pollution prevention

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Sustainability

Operating in today’s unstable market is not good for owners but then, nor is

it good for charterers either. Charterers should start asking

questions about paying rates that are so low as to jeopardise the good

operations of shipowners,Riccardo Barratozzi, Shipping Vice President of ENI Trading & ShippingINTERTANKOHellenic Panel end of March in Athens

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Chain of responsibility/sustainability

Shipowner ChartererClass

Bank Broker

Insurer

Shipbuilder

Flag

Nobody works in a vacuum

Changing preconditions

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Historical VLCC hire and bunker costs

1992 2002 20120%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Bunker

TC hire (+port costs)

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Mounting losses

• Piracy costs• Overage• Bunkers (LS/SECA) • Laytime• Demurrage• Age

..andNOT only the Supply/Demand balance favour charterers, owners are squeezed on:

2008

2009

2010

2011

2012

-10,000

10,000

30,000

50,000

70,000

90,000

110,000

130,000IRR 6%, docking costs $1-4 m per 5 year pe-

riod, residual value $20m after 25 years

Based on NPV calcula-tions

VLCC spot and break-even rates$/day

Break-even rates

Freight rate TD-3

Year Price OPEX2008 $150 m $ 9,000/day2009 $101 m $ 9,500/day2010 $105 m $ 9,500/day2011 $ 99 m $10,000/day2012 $ 90 m $10,000/day

Market distortion

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Oil transportation shared risk venture?

Lack of transparency – increase private cargoes 

Perception that brokers are the oil companies proxy chartering arm - owner’s broker removed

 

Negotiation only price driven, long term operational issues suffer – contrary to oils policy?

Owners pay broker fee, but feel theyreceive little added value related to CP notifications, post fixture service, claims, late freight payment, professional expertise…

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Market distortion

Only the tanker owners feel the full pain of the serious oversupply of tonnage and lack of risk balance in the

market

Charterers take full advantage of their market power and owners’ fragile position to squeeze the owners not

only on rates and terms and conditions.

Owners too weak and fragmented to resist

Need to obtain allies and create awareness of the unsustainable situation before it deteriorates

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Market distortion and oversupply

Prolonged market distortion and oversupply 

Bankruptcy, disruption to the supply of tonnage and

potentially increase the safety risk and damage to the environment 

Sustainability threatenedStakeholders in the industry lose trust and credibility

More difficult access to good finance, good expertise and reduced profitability and society will require stricter regulations and control

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Market distortions – changing preconditions

• Why should this be the case?• Why should the market continue to use Worldscale?• How can brokers increase the value of their service to

the the owners to justify the commission?

Service fees: 1.25% is paid on gross freight, protects the broker and is not comparable to other segments.

INTERTANKO members have therefore started to ask:

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Public image drives profits

Public image drives profits. Corporations know this and, crucially, so do their shareholders. Michael Woodford - Financial Time 22 October 2012

The tanker owners serve the oil industry

Brokers serve them more

Oil transportation should be a shared risk venture

Meeting the brokers

Leading the way; making a difference

Meeting the brokers

1. The 1.25% broking commission is not really the issue2. Brokers have the same interests 3. Owners often their own worst enemy

• P&C and COAs are offered by the oils to get better rates, but

• Owners accept as they feel privileged to be approached• Rates immediately react to changing bunker prices • Everything depend on the spot market – owners

contribute to diminish it4. Brokers’ service insufficient5. Brokers research could to s greater extent warn about the

risks in the market instead of the opportunities

Leading the way; making a difference

Meeting the brokers

1. The 1.25% broking commission is not really the issue2. Brokers have the same interests 3. Owners often their own worst enemy

• P&C and COAs are offered by the oils to get better rates, but

• Owners accept as they feel privileged to be approached• Rates immediately react to changing bunker prices • Everything depend on the spot market – owners

contribute to diminish it4. Brokers’ service insufficient5. Brokers research could to s greater extent warn about the

risks in the market instead of the opportunities

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Meeting the brokers

• Oil companies charterers incentivised by beating themarket

• The cancer of fixing at or below last done• SIRE is not only rational quality control but used commercially• Big oils increase exposure to the spot market makes them

vulnerable• The situation is neither seen nor understood

• Oil company chartering departments of the lack experience and understanding

• Oil company boards do not know have tankers on their agenda

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Meeting the brokers

One of INTERTANKO’s challenges may be to get the message to the tops of the oil

companies that the current situation is not sustainable and that it makes them vulnerable

The brokers were willing join forces

Shared risk venture??

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Moving forward

INTERTANKO aims to involve all stakeholders to remove distortions in the market to the benefit of everybody

 The objective of such engagement may be defined as:

         The re-creation of a sustainable tanker industry by

working for transparency, balanced terms and conditions, and allowing for a fair risk sharing amongst stakeholders

Leading the way; making a difference

It’s unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money — that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot — it can’t be done. If you deal with the lowest bidder, it is well to

The Common Law of Business Balance

John Ruskin (1819-1900)

add something for the risk you run, and if you do that you will have enough to pay for something better.

...prominent social thinker and philanthropist