Tankers - turning the corner?

Jun 30 2013

Despite the problems besetting the marine industry in terms of low freight rates, Danish-based owners and operators are probably better placed than most, due to each consecutive governments tending to support the idea of 'Blue Denmark'.

Naturally, there have been and still will be problems, especially in the tanker sector, such as those afflicting TORM and Nordic Shipholding. On the plus side, the more positive approach of the Danish government has attracted owners from Sweden where the government seems to be not interested in the shipping industry.

One of the major issues for any shipowner is tax. To help Danish owners to fix their annual costs, in 2001 the Danish Parliament passed a tonnage tax scheme, recognising that shipowners could only continue developing their activities based in Denmark and with ships under the Danish flag, if tax and investment conditions were adapted to prevent the competition from forcing shipowners to relocate outside Denmark.

However, with considerable annual foreign exchange earnings that reached DKK183 bill in 2011, keeping shipowners in Denmark is clearly in the national interest, the Danish Shipowners’ Association (DSA) said. This is because shipowners contribute taxes to the Danish Treasury and employ Danes both at sea and on land.

The DSA explained that since 2001, Danish shipowners have paid the so-called tonnage tax instead of standard corporation tax. In practice, shipowners pay a fixed tax amount per net tonne at their disposal while other companies pay taxes based on income, expenses and depreciation.

Thus, tonnage tax is paid regardless of income and regardless of whether the shipowner shows a profit. The scheme allows for stable and more predictable tax payment, putting shipowners on equal terms with competitors in an international, fiercely competitive market. The EU recommends the scheme, and similar schemes exist in almost all European shipping nations, as well as all overseas maritime centres, the DSA said.

The DSA outlined several points to keep the country competitive in the maritime sector –

  • Danish shipowners need framework conditions that make them competitive in a global market.
  • The Danish Ministry of Taxation estimates that shipowners pay the same amount of tax, as before the introduction of tonnage tax in 2001. Thus, the scheme has not caused the Danish government to lose any revenue.
  • The shipowners' tax payments are on a par with other Danish limited liability companies' payment of corporate tax.
  • Tonnage tax gives shipowners far better opportunities to make long-term, strategic investments without having to consider tax depreciation issues, etc.
  • The tax scheme provides the shipowners with the necessary incentive to maintain and continuously expand tonnage under the Danish flag, and, together with DIS, has contributed to considerable growth for the industry and society.

In May of this year, the DSA published its annual shipping statistics, which showed the continued growth of the Danish shipping industry over the past 25 years. Indeed, according to the figures, Denmark remained the fourth largest shipping nation in the world, while the Danish shipping’s annual foreign currency earnings set a new record.

Despite the imbalance between supply and demand being expected to prevail for some time yet, the Danish merchant fleet has experienced growth and since the start of the crisis in 2008 it has increased by 78 ships of 1.4 mill gt, or 1.5 mill dwt of all types.

Liner shipping accounts for the largest growth pattern with 800,000 gt, closely followed by tankers with a growth of 600,000 gt during the last 4½ years. There has been some decline in drycargo ships, but it is worth noting that specialised vessels, eg serving the offshore industry, have gone up by 90 units and doubled their tonnage in the same period, the DSA said.

With its more than 11 mill gt, the Danish merchant fleet constitutes 1.1 % of the world fleet, which makes it the 18th biggest. In addition, Danish shipping companies own a significant number of ships under foreign flags, thus bringing the Danish owned fleet up to 30 mill gt (excluding specialised vessels) and up to 9th place in the world ranking, only exceeded by the largest industrialised countries and Greece.

Overall, Danish owners control around 3% of the world’s tonnage, while 6% are commercially operated from Denmark, through charter contracts and pooling systems.

A further doubling of numbers in terms of Danish shipping’s international importance comes from including vessels chartered, or otherwise controlled by Danish interests, ie operator activity.

Overall, the Danes controlled 92 mill dwt of vessels of all types as of May of this year, made up of 14 mill dwt under the Danish flag, 29 mill dwt under foreign flags and 49 mill dwt chartered, totalling more than 2,000 vessels of 62 mill gt, making Denmark the 4th biggest shipping nation in the world, exceeded only by Japan, Greece and China. Danish owners and operators transport about 10 % of world trade, the statistics claimed.


Low orderbook

The vessels ordered prior to 2009 have now been delivered, and the Danish companies’ orderbooks stand at a relatively low level. The shipping companies’ fleets are thus updated, modern and environment-friendly, as a consequence of the great influx of new ships, the DSA claimed.

During 2011, however, a considerable amount of tonnage was ordered, some 53 vessels of 4 mill gt with a value of DKK40 bill. Delivery of these ships commenced from this year.

Slight optimism in some segments, as well as possibilities of attractive contracting prices prompted some owners to order ships in the past year. This year to May, 19 commercial vessels and two supply ships had been ordered. Danish owners’ orderbook as of 1st May, 2013 totalled 92 ships of 4.9 mill gt, or 5.9 mill dwt (excluding timecharter contracts with purchase options). This took Denmark into 13th place among the shipbuilding nations on the world orderbook list.

Danish shipping’s foreign currency earnings have shown strong growth for many years, except for a plunge to about DKK140 bill in 2009, when the crisis was at its worst. But the following year, the figure had risen to DKK179 bill and the increase continued in 2011 where gross foreign exchange earnings reached DKK180 bill. Finally, in 2012, the previous record was surpassed, as gross earnings reached DKK195 mill.

Shipping has developed into the single most important contributor to the Danish balance of payments, and, despite unsatisfactory net results in several segments, Danish owners are in a good position to weather the remaining period of crisis and imbalance, the DSA said. Some market analysts believe that 2014 will mark a turnaround in the drycargo and tanker markets- others point to 2015.

As of 1st May, in the tanker sector, mainly due to the build up of the chemical/product carrier segment, the Danish merchant fleet included 174 tankers, compared to just 96 of in 2003. These are made up of 101 product carriers, 70 chemical tankers and three LPG carriers.

Denmark was in 9th place by domicile of owner in the tanker sector with 10.1 mill gt and 4th place as operator with 21 mill gt of tankers. The Danish share of the chemical/product tanker sector was 3.2%, according to the DSA statistics.

At the beginning of this year, Danish domiciled owners had 24 tankers on order of 872,000 dwt. However, this figure would have changed quite considerably, as 2013 came to its half way stage.


IMO frustration

Meanwhile, Danish Maritime has expressed dismay with the IMO Marine Environment Protection Committee (MEPC), due to the expected delay in the introduction of two important environmental initiatives. These were stricter requirements for NOx emissions from ships and the treatment of ships' ballast water.

"We very much regret the decision. IMO’s signal to the outside world is very boring, as it can be led to believe that the maritime industry is not ready with solutions that can reduce NOx emissions. This is not true. Danish suppliers have a full catalogue of good solutions for reducing NOx", claimed Danish Maritime CEO, Jenny Braat.

Danish Maritime said that it doubted whether the legal basis for the decision is sound and will therefore ask the industry's European organisation, SEA Europe, to see if the decision is in conformity with the Convention, adopted by the IMO in 2008.

"Unfortunately, IMO have at the same moment decided to change the phasing-in of requirements for ballast water solutions so that its entry into force is further delayed to the detriment of the companies that have invested heavily in approved ballast water solutions and companies that have already invested in ballast water systems.

"It is important that the IMO decisionmakers do not compromise on the environmental measures adopted for the benefit of both the environment and health. If an expectation arises that the IMO requirements are postponed, even after they have been adopted, although not fully ratified, it could have serious consequences for the companies that want to explore and develop in new green technologies. If the legal requirements in this way are watered down, doubt is created about the seriousness of IMO,” she concluded.

Below, we have highlighted some of the leading Danish tanker concerns’ first quarter results, as many are leading players in the chemical/product carrier sector, which has seen something of a renaissance recently.

For example, one of the troubled Danish concerns - TORM - reported its best ever quarter this year since the financial crisis hit shipping, boosted by rising product tanker rates.

In May, CEO Jacob Meldgaard reported; “The seasonally strong first quarter in the product tanker segment was the best we have seen since the beginning of the financial crisis. TORM positioned itself well to take advantage of the market improvements, and we saw the positive effects of TORM’s restructured timecharter fleet and the cost programme. Cash flow from operations after interest was positive.”

The company managed to reduce its quarterly losses at the end of March this year to $16 mill, compared to $79 mill in the first quarter of 2012. However, the company is by no means out of the woods yet, as it was still forecasting a loss of $100-$130 mill, although any further vessel sales or impairment charges would alter this scenario, either positively, or negatively.

Part of the success was down to TORM’s cost cutting programme, which led to a 14% reduction in administration costs to $14 mill, compared with $17 mill at the same period in 2012.

Over the past year or so, the company has cancelled its newbuilding programme meaning that it has no capital expenditure going forward on new vessels. TORM said that it expected to remain in compliance with its financial covenants this year. In addition, the company said that it expected to be operational cash flow positive following interest payments.

However, TORM did admit that the uncertainties and sensitivities surrounding future freight rates and asset prices, may have an affect going forward. An upward swing in freight rates of $1,000 per day will have a positive impact on its profit before tax of $18 mill, the company claimed.

Another company teetering on the brink is Nordic Shipholding, which was reformed into a pure products tanker owner, following the sale of its chemical tanker fleet during the second quarter of last year.

In the first quarter of this year, the company announced that its lenders had decreed that the installments and loan covenants were only to be deferred until 30th June, this year. However, the company has since won another stay of execution to 30th September. The company said that it had been in close dialogue with the banks and several potential solutions have been considered.

As a consequence, Nordic Shipholding had by the end of 2012 written-down the value of its vessels to an estimated market level of $123 mill and as a result, the share capital was lost, and the debt reclassified as short-term.

Both the company and its banks were in firm discussions with potential investors regarding potential equity injections, Nordic Shipholding claimed in May, but warned that in case those discussions proved futile, the company's banks would carry out a controlled winding up of the company.


Debt moratorium

Discussions were successful in extending the 30th June moratorium in order to allow enough time to negotiate and conclude a potential equity injection, or a controlled winding up, to ensure there was no disruption to the vessels’ operations.

Michael Skov’s Tankers International is involved with the day- to- day commercial administration of the company.

Nordic Shipholding reported more bad news as in December 2012, Nordic Ruth went offhire due to severe damages found in the vessel's water ballast tanks. The expected offhire period is six months. However, the period is expected to be covered by the insurance.

In the first quarter of this year, the company closed down dormant subsidiaries in Singapore and the US and expects to close down other dormant subsidiaries in Denmark during the second quarter.

Mainly due to the Nordic Ruth’s offhire, in the first quarter of 2013, TCE revenue decreased by $1.6 mill to $5.7 mill, compared with the first quarter of 2012. EBITDA declined from $3.4 mill in first quarter of 2012 to $1.3 mill in the first quarter of this year.

Year to date, the cash flow from operations was $1.5 mill, primarily deriving from operating activities including working capital improvements. The comparable figure for 2012 was $1 mill.

In the first quarter of this year, drybulk and tanker owner NORDEN reported a huge drop in EBITDA to $10 mill down from $50 mill in the first quarter of 2012. This was mainly due to the downturn in the drybulk markets.

NORDEN described the drycargo markets as over supplied leading to very low rates being attained. However, the product tanker market rates were above expectations.

During the quarter NORDEN ordered, or timechartered in, 13 fuel efficient drybulk carriers and four MR tankers. The total investments amounted to $445 mill in the form of direct investments and capitalised timecharter liabilities.

As a result of lower earnings, EBIT amounted to a loss of $7 mill, while results for the period were a negative $11 mill. After 2012’s massive drop in ship values, the curve has now leveled off and the value of owned vessels, which were on the books for the entire period, dropped by 1% during the quarter. The drop is on par with ordinary impairment of the vessels, which are written off over 20 years.

NORDEN said that it maintained its forecast for the results for the year with a group EBITDA of $15-45 mill.

President and CEO Carsten Mortensen commented while announcing the first quarter results: "In the last couple of months, NORDEN has taken advantage of the attractive newbuilding prices to expand the newbuilding programme by a total of 17 fuel efficient vessels.

“The company will thus be in a strong position when the markets become more balanced. Scrapping of drycargo vessels is still at a high level with around 7.5 mill dwt in the first quarter, and we can be pleased that the tanker department has generated good earnings in an otherwise bleak first quarter. But as already announced, 2013 will be a very difficult year earnings-wise."


Tanker earnings higher

NORDEN’s tanker department had a good start to the year and generated an EBITDA of $11 mill. The earnings level was higher than expected, and in January, the highest monthly earnings in four years were realised.

Spot earnings in the MR sector were at $17,850 per day during the quarter while earnings including coverage were $15,900 per day. In total, earnings were 17% above average one year timecharter rates distributed with 21% in Handysize and 14% in MR.

The high rates in the first quarter were generally driven by good market activity with the Port Arthur refinery in the US commencing production following major startup difficulties in 2012.

At the same time, one of the world’s largest refineries – the Amuay refinery in Venezuela – is operating at half capacity after a severe fire in August last year requiring further imports to a region, which is already a net importer of refined oil products.

The long winter in Europe also provided operators of ice-classed vessels, such as those operated in the Norient Product Pool (NPP), with the opportunity to obtain more premiums on ice-enhanced tonnage on cargoes going out of the Baltic and at the same time, 22% more diesel was transported out of St Petersburg in March compared to last year.

The first quarter was also characterised by many newbuilding contracts, especially for the MR and LR2 vessel types, NORDEN said. At the same time, deliveries were high with 25 MRs delivered to the fleet in the first quarter but only one being scrapped.

Compared to the same period last year, an additional 11 MRs were delivered this year. On the other hand, the negative fleet growth in Handysize accelerated during the period where nearly 170,000 dwt was scrapped while only 40,000 dwt was delivered.

In total, fleet growth in the first quarter was about 1.5% for MR and Handysize, collectively. The supply of newbuildings is expected to decrease for the rest of the year but a fleet growth rate of around 4% is still expected for 2013.


Maersk sell-off

The AP Moller-Maersk group continued to dispose of perceived non-core assets. The latest vessels to be sold off were the VLGCs owned by Maersk Tankers.

BW Group has taken over the five owned and five chartered VLGCs from Maersk. APM said that this divestment is part of Maersk Tankers’ strategy to focus on fewer segments.

Maersk Tankers and BW Group said that they would ensure a smooth transition of the vessels. The sale is still subject to approval by competition authorities. The parties have agreed not to disclose the terms and conditions of the sale, they said in a joint statement.

This move follows last November’s sale of 11 Handysize LPG carriers to Navigator Gas, which would help to release capital for future investments, Maersk said at the time.

Maersk Tankers said that it would fulfill all existing contractual commitments and the vessels will be delivered individually to Navigator Gas during the period 31st January through the fourth quarter of 2013.

These divestments still leave the APM tanker subsidiary with more than 4,000 people offshore and onshore. The company now only operates in the crude and product segments and manages a fleet of more than 200 vessels.

Another famous old Danish company with a finger in many pies is the J Lauritzen Group. This company reported a net loss for the first quarter of this year of $25.6 mill, compared with a profit of $1.1 mill in the corresponding quarter of 2012.

EBITDA was $9.4 mill for the first quarter of 2013 against $37.9 mill in the first quarter of 2012, which included non-recurring income from settlements and EBITDA from the accommodation and support vessel Dan Swift.

“The world economic and political uncertainty and the tough business environment for international shipping that prevailed throughout 2012 continued into the first quarter of 2013. EBITDA for the first quarter of 2013 was in line with our expectations and down compared to the first quarter of 2012, but better than in the fourth quarter of 2012. We maintain our expectations for full-year EBITDA of $60-80 mill in spite of the continuous challenging business conditions for maritime transport, in particular in the drybulk segment,”, said Jan Kastrup- Nielsen, president and CEO.

One of Lauritzen Kosan’s pressurised gas carriers built in 1998 was sold late April 2013. In addition, JL’s share of an MR product tanker was sold early May 2013. The two transactions will cause a combined minor book loss of $2.1 mill but will have a positive cash effect of $11 mill, the company said.

In JL’s wet segments, Gas subsidiary Lauritzen Kosan’s EBITDA was $8.7 mill, compared to $13.9 mill in 2012 and operating income was $2 mill compared to $7.1 mill in 2012.

This decline was due to difficult market conditions, in particular in Europe and declining shipments out of the Middle East, mainly as a result of the continuation of sanctions against Iran.

As for Lauritzen Tankers, due to seasonal factors and stronger economic fundamentals in the US, spot market rates for MRs held up quite strongly during the first quarter.

EBITDA was $6.5 mill, compared to $3.9 mill in 2012 and operating income was $4.2 mill, compared to $2 mill in 2012. The improvement was mainly due to strengthening of the spot market.

As for the outlook, Lauritzen reiterated its previous expectation that economic growth will be somewhat subdued during the first half of 2013. A number of indicators suggest that economic growth will strengthen as the year progresses. Once economic growth rises, the company expected to see inventories rebuilding, which will contribute to seaborne trade growth.

Overall, market conditions were unchanged. An expected decline in supply growth together with rising demand growth is anticipated to lead to improved market conditions in drybulk during the second half of the year.

The market for smaller gas carriers is also expected to see a slight improvement in the second half. Seasonal factors may reduce spot market earnings for MRs in the coming months with improved vessel utilisation towards the end of the year.

However, the net result for 2013 is anticipated to remain unsatisfactory with an expected loss of $75-100 mill. In JL’s continuous efforts to adjust the tonnage portfolio, additional sale of assets may negatively affect the result for 2013, but have a positive effect on JL’s cash position, the company said.

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