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How Long, How Deep?

by Martin Stopford, 10th April 2009

Martin Stopford

Market sentiment is a powerful emotion.  When rates boom it is hard to remember what it was like at the bottom, and in recessions recovery always seems a long way off.  Remember the early 1980s when nobody thought VLCCs would ever be ordered again (really!)?  Hundreds of orders later it seems ludicrous, but it happened.  How do you explain that?

Where Next?

Recently the tanker market has been awash with sentiment.  Six months ago it was "full steam ahead".  Consensus said that rates of $40-60,000 a day were here to stay, at least for the next couple of years.  Today it is a very different story.  Gloom is spreading thickly over the market, with predictions that Aframax rates will slump to $10,000 a day next year.  Nasty.  Is this reality, or is sentiment pulling our chain again?  That's the million $ question.

$10,000 a day is tough

During the 1990s such low rates were rarely seen in the Aframax market.  Our graph shows Aframax earnings since 1990.  During the 11 year period Aframax rates were below $10,000 a day for only 8 months.  On that basis the chance of rates falling below $10,000 a day in any month next year is about 20-1 against (i.e. 8 months divided by 146).  Bookmakers reserve 20-1 odds for outsiders, so Aframax owners can feel pretty safe.  Or can they?  The 8 months of super low rates were not evenly spread.  As the graph shows they were all bunched in two years, 1992 and 1999.

Wow, That's Low

The really appalling spell was in 1992 when Aframax earnings broke the $10,000 a day barrier in March and stayed there until October, a run of 7 consecutive months.  The second was in 1999 when Aframax rates hit $9,700/day in October.  Chartists will be quick to note that both these slumps followed a market peak.  Since neither peak was anything like as strong as the one in 2000, any bookmaker who saw this chart would probably up the odds on Aframaxes breaking the $10,000/day barrier next year down from 20-1 to 5-4.  The bulging Aframax order book, which stands at 25% of the fleet, supports this view.

Hidden form

But there is some good news.  Only one third (4 m dwt) will be delivered in 2002, and there still plenty of mid 1970s Aframaxes to scrap.  Despite strong earnings, scrapping this year is running at 2 m.  dwt pa, so there is every chance that even more will go if rates slump.  And with the world economy already in recession, maybe we have already taken much of the demand side pain.

Back The Favourite

So there you have it.  For Chartists the single figure outcome is a dead cert, but horses sometimes develop an unexpected turn of speed, and Aframaxes have pretty good form.  So if you are a punter and you fancy a flutter on an Aframax next year, our advice is this is.  Better take the good odds while you can! Have a nice day.