A wave of consolidation in the VLCC market is likely in the next decade, creating a select group of mega-carriers and making it difficult for smaller players to survive, a top Middle East oil-tanker company official said recently.
The National Shipping Company of Saudi Arabia (Bahri) expects to add another 19-29 VLCCs to its fleet in the coming years, bringing the total number of VLCCs it operates to 50-60 vessels.
“Bahri is ambitious to expand for the future and to acquire 50-plus VLCCs,” Nabeel M. Al Binhassan, vp commercial, Bahri Oil Transportation, told the Gulf Ship Finance Forum in Dubai.
“There is no precise date [for fleet expansion]. This is the vision of how we look at the business.”
Despite the recent uptick in VLCC day rates, earnings in the four years to 2014Q4 had left operators largely unable to cover their average costs of between $25,000 and $30,000 a day, Al Binhassan said. As a result, Bahri saw net income decline 56% in the fourth quarter last year.
But he said the glass should be seen as half-full, rather than half-empty, with the global financial crisis leading to increased efficiency, cost control and industry consolidation.
The addition of 14 VLCCs from the merger of the Vela fleet, completed in late 2014, to Bahri's existing fleet of 17, resulted in a consolidated fleet of 31 VLCCs. Other assets to come to Bahri from the merger were one aframax and four MR product tankers, and one VLCC FSU.
The VLCC sector remains fragmented with the top five carriers controlling only 25% of fleet capacity, and the top ten only 41%.
Meanwhile, the operating fleet position in the container business, where mega-carriers dominate, means the top five carriers control 50% of fleet capacity, while top-ten carriers 68%.
“There is slow industry organic growth because of the challenges for small owners to accumulate cash to grow,” he said. “We were working for almost five years below the breakeven level.”
He believes the top five VLCC owners will soon control 41-48% of the fleet after consolidation.
He said that the current global VLCC fleet comprised 635 vessels with 85 more newbuilds under construction. “Today we have around 720 VLCCs either on-water on in the orderbook,” he said.
Underlining the trend under discussion, deals struck in 2014 in the VLCC sector included Euronav’s purchase of 15 VLCCs from Maersk Tankers, and the DHT Holdings acquisition of Samco Shipholding’s fleet of seven ships, he said.
“It was a surprise to many of us when we saw the alliances between Tanker International and Frontline, where they put more than 67 ships together,” he said.
China’s ambitions were not limited to 50-60 ships, he said. “When we go and talk to them, we notice that the number they are really trying to achieve is between 80-100 ships. Of course, there are commercial and strategic drivers behind this.”
China was also an emerging force on the customer side, he said. “Today we see Sinopec and PetroChina are not just moving towards controlling the volumes they bring to their country, but also expanding on the third-party trading side.
“Saudi Aramco has the potential to become a large customer in the tanker business.”
Al Binhassan said sukuk funding would be a major fleet financing tool. Some $110bn was issued in global Islamic bonds in 2014, and he expects a further $150-$175bn in 2015 and $250bn by 2020.
“There is huge potential for the banks and owners to do something. There is huge potential that we will see some kind of consolidation in the tanker industry.”