Analysis: Shipping firms sail to wartime fortunes
March 29, 2003 By Ingrid Mansell
Our correspondent looks at how the need for oil during Gulf conflicts has been the making of many a tycoon
DURING the Iran-Iraq war in the 1980s, John Fredriksen, the son of a modest Norwegian welder, ran tankers backwards and forwards to the huge Iranian oil port at Kharg Island.
The run was risky. And extremely lucrative.
Fredriksen emerged from the conflict with a massive personal fortune — and another billionaire shipping tycoon was born.
Nearly 20 years later, as everyone from Gordon Brown to Rod Eddington, the chief executive of British Airways, counts the mounting cost of the current war against Iraq, Fredriksen will again start counting his mounting dollars.
His group of shipping companies, which together owns more than 80 super tankers, is perfectly positioned to profit from the recent war-inspired spike in tanker rates.
As David Osler, industrial editor of Lloyd’s List, the insurance and shipping newspaper, puts it: “These are good times for the guys with the right ships. It’s at times like these that fortunes are made.”
The current shipping climate has echoes of the 1970s, when the giant tankers of the so-called “Golden Greeks”, Aristotle Onassis and Stavros Niarchos, thundered down the world’s richest oil routes, raking in tens of thousands of dollars a day for their owners.
Rates for very large crude carriers (VLCCs), which are able to carry two million barrels of oil, have skyrocketed in recent months.
In 2002 the average earnings per day for a super tanker running between the Gulf and Europe was $20,363. So far this year, the average rate is $67,425 and ship brokers are starting to get reports of rates as high as $110,845 a day.
Martin Stopford, head of research at Clarksons, the shipping group, said: “Apart from a brief spike in 2000, there has been nothing comparable to those levels since 1973.”
The rising rates mean that people are once again starting to talk of tanker shipping in terms of great wealth, rather than environmental disasters.
Fredriksen knows both sides of the industry well. While tankers delivered him his fortune, currently estimated at $1.2 billion (£765 million), they have also given him his share of woe.
It was Fredriksen’s Sea Empress, which, in 1996, was responsible for one of the worst oil spills off the British coast in recent years. The ship was relatively new and had cost $60 million. Human error was blamed for the spill near Milford Haven, which eliminated vasts numbers of different wildlife. Fredriksen’s immediate emotional response was reportedly to threaten to quit the tanker market. Aides said that he did not sleep for days while the affair was headline news.
The risk of oil spills — and the potentially huge liability associated with them — is one of the major reasons why the world’s oil majors have moved to limit their exposure to the tanker business over the past decade.
Last December Statoil, the Norwegian oil company, agreed to sell its Navion shipping unit to the New York-listed Teekay Shipping Corporation for about NKr6 billion (£520 million).
Osler says that tanker owners are a “swashbuckling” breed. “You’ve got to be a risk taker, a bit of a player” he says.
There are now 430 VLCCs on the market. These ocean-going colossi follow two major long-haul routes: they either turn left out of the Gulf towards Asia — the fastest growing market for oil — or they turn right, travel around the Cape of Good Hope, off the southwest of South Africa, and on to the United States and Europe.
Of the 430 ships, about half are “own trade”, meaning that they are either owned by oil companies, or by companies that charter them out to oil companies. The other half operate on the spot market. In other words, Stopford says: “They arrive in the Gulf and say ‘Hi, I am for hire’.”
Because time charter rates are fixed, it is the owners of vessels on the spot market that stand to rake in the biggest fortunes as the rates escalate.
Middle East conflicts have a history of being rewarding to budding shipping tycoons.
Onassis reportedly made a fortune through the Suez Crisis, when Gamel Abdel Nasser, then Egypt’s President, nationalised and blocked the Suez canal at the start of the Six-Day War on June 5, 1967.
Desperate oil producers suddenly found that they needed ships to transport oil all the way around the Horn of Africa — a far greater distance. Enter Onassis, who contracted his supertankers to the companies at exorbitant rates, earning himself many enemies, but also vast wealth.
Industry experts say, however, there are unlikely to be any overnight rags-to-riches stories from the current conflict. They believe the world’s tanker market is already pretty well tied up by established owners, such as Fredriksen’s Front Line and Teekay.
Owners such as Fredriksen were able to make their fortunes by buying tankers at bargain-basement prices, when the industry was in a state of depression.
In the run up to the Yom Kippur War in 1973, for example, some tankers paid for themselves after only a couple of voyages.
But things have been different in the run-up to this conflict. When the market was heavily depressed in the late 1990s, the industry took its own protective measures before it hit the stage where wannabe shipping tycoons could snap up its spoils.
In 1999 tankers were getting rates of only about $10,000-$11,000 a day. That September, the industry responded by scrapping about 24 VLCCs over a period of three months.
The scrappings were significant, representing 10 per cent of the fleet on the spot market and 5 per cent of the world’s total fleet. Fortunately for the remaining tanker owners, the move to strip capacity out of the market coincided with a take-off in the demand for tankers, which meant that there was “a double whammy effect” and rates soared.
Another reason why this particular war may not prove as profitable for tanker owners as the earlier conflicts is because it was so widely predicted. This means that it would not have caught any of the oil companies on the hop.
David Bradley, freight market reporter at the Baltic Exchange, says: “The inevitability of the war allowed a lot of oil companies to take cover.
“They have spent the past few months getting as much oil on to the water as possible.” So why the recent spike? Analysts say that disruptions to supply in Venezuela and Nigeria mean that oil companies have to source their crude from further afield. This has led to increased demand for long-haul vessels, which in turn has led to higher rates.
But while the experts are cautioning against putting the recent spike in tanker rates entirely down to the war in Iraq, they admit that the spot tanker market is much like the stock market. As such, it incorporates a large degree of sentiment.
“If these sentiments move in a ship owner’s favour, because of a war for instance, they can lead to very rapid increases in tanker rates — and vice versa,” Stopford says.
Whether or not the tanker owners earn as much from this war as they have from others remains to be seen. But one thing is certain: they are making money now and a lot of it.
As Stopford says: "The tanker business has spent a long time in the doghouse, but once it gets going, there are few businesses that can generate so much cash so quickly.”
THE WORLD'S TOP TANKER OWNERS
Company Fredriksen Group No of tankers 80 Average age (yrs) 7.3 Average size (in deadweight) 243,541
Company Mitsui OSK Lines No of tankers 77 Average age (yrs) 7.6 Average size (in deadweight) 146,926
Company Teekay Shipping No of tankers 89 Average age (yrs) 11.8 Average size (in deadweight) 101,329
Company Nippon Yusen Kaisha No of tankers 36 Average age (yrs) 6.2 Average size (in deadweight) 234,391
Company World-Wide Shipping No of tankers 30 Average age (yrs) 9.3 Average size (in deadweight) 238,787
Source: Clarksons Tanker Register 2003