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

Read Reuters, 03.28.03, 4:55 PM ET NEW YORK, (Reuters) - Gold prices closed higher on Friday amid uncertainty about how well the war in Iraq was going and after the brief closing of a New York City bridge fanned ever-present jitters about terrorism. Uncertainty about Iraq also kept oil traders nervous but oil ended the day lower on a round of profit-taking after the Organization of Petroleum Exporting Countries indicated there was more than enough oil to cover any shortfalls from Iraq. At the COMEX, gold found support on growing sentiment that the week-old conflict in Iraq will drag on longer than U.S. war planners had expected. New York financial markets also remain jumpy about the threat of reprisal attacks against Americans. The dollar fell to its lowest level against the euro since the start of the war after police closed the Williamsburg Bridge linking Manhattan with Brooklyn for more than two hours on Friday morning, arresting three men. Police later said the men had climbed it in a drunken prank and were not terrorists. But the euro stretched its rally to $1.0801, its highest since March 17, making dollar-denominated gold more affordable to European investors. COMEX April gold closed up $3.10 at $331.50 an ounce. Analyst David Meger at Alaron Trading said the main factors in gold's pop were the dollar "and continued talk that maybe things aren't going quite as well as they planned in Iraq." A soft stock market also drove investors toward gold and other safe havens like the Swiss franc and U.S. Treasuries. The Dow Jones industrial average closed 55 points lower at 8,145. Gold bullion closed at $331.60/2.20, up from $328.40/9.00 at Thursday's New York close. London dealers earlier fixed the afternoon spot reference price at $330.75 an ounce. At the New York Mercantile Exchange, June palladium fell $9.65 to $188.00, setting a new contract low -- and 5-year low -- at $178. Automakers who use palladium to make pollution control devices did only mild bargain-hunting this week. NYMEX oil prices, meanwhile, ended a two-day rally and closed lower as OPEC assurances of ample crude supplies offset worries about production halts in both Iraq and Nigeria. Crude oil for May delivery closed 21 cents lower at $30.16 a barrel after trading between $29.85 to $30.85. The overnight high of $31.05 in screen trading marked a 14-percent rise since Monday and was the highest price since the war began in Iraq. In London, May Brent crude fell 47 cents at $26.35. U.S. Deputy Defense Secretary Paul Wolfowitz said on Friday the U.S. offensive in Iraq was going as planned. But the United States also announced it was sending another 120,000 troops for the fight to depose Iraqi President Saddam Hussein. The conflict has erased Iraq's 1.7 million barrels per day of crude oil exports at a time when 800,000 barrels a day of Nigerian output was also shut down by ethnic clashes there. "The assumption to date has been that Iraq's export disruption would end by the start of the third quarter, which coincides with a significant global increase in the demand for OPEC oil," said oil analyst Michael Rothman of Merrill Lynch. "If Iraq's production outage extends beyond the second quarter period, OPEC would not be able to meet market requirements," Rothman said. However, OPEC Secretary-General Alvaro Silva said in Vienna that there was more than sufficient oil supply in world markets and in fact the cartel was on alert for signs of a glut. "Even with the cessation of Iraqi exports and the temporary oil output reduction in Nigeria, there is still plenty of oil on the market," Silva told reporters. Led by a jump from Saudi Arabia, OPEC output rose by 430,000 barrels a day in March to 28.36 million bpd, Geneva-based energy consultancy Petrologistics said on Friday. Extra oil was added by Kuwait, the United Arab Emirates and Venezuela, where the state oil company restored a large amount of production after a two-month strike. NYMEX May gasoline closed 1.41 cents lower at 94.35 cents a gallon and May heating oil fell 2.03 cents at 75.70 cents. At the Chicago Board of Trade, wheat closed lower as speculators cashed in some profits ahead of U.S. Agriculture Department initial estimates for U.S. plantings due on Monday. Wheat for May delivery closed 4-1/4 cents lower at $2.79-1/4 per bushel. May soybeans closed 1/4 cent lower at $5.80 a bushel and May corn fell one cent at $2.27-3/4. Traders said they expected USDA to predict record corn plantings of about 80.5 million acres, up from 79.1 million last year, with soybean acreage falling to 72.4 million acres from 73.8 last year. Acreage for all forms of wheat was expected to rise to 62.5 million from 60.4 million a year ago.

<a href=www.globes.co.il>More Zeev Klein   25 Mar 03   14:16

"International Investor's" did not refer to the possible ramifications the Iraq War and Benjamin Netanyahu’s appointment as minister of finance may have on Israel’s economy.

Israel’s position on international financial markets is deteriorating. Israel’s ranking fell to 45th place in " International Investor's" Country Credit Ratings for 2002, with 56.1 points out a possible 100. The new score is a 2.5-point drop in Israel’s rating for its economic performance in the past six months.

The rankings appear in the bi-annual journal’s March issue.

Israel’s ranking has slipped seven places in the past 30 months since the outbreak of the intifada and high-tech crisis in late 2000.

"International Investor's" did not refer to the possible ramifications the Iraq War and Benjamin Netanyahu’s appointment as minister of finance may have on Israel’s economy. Nor is there any specific reference to the government’s new economic plan.

The main losers from global economic crises in 2002 were Uruguay, Argentine, Venezuela, Brazil, and Japan, which lost between 17.4 and 3.9 points.

The main winners last year were Russia, South Korea, Afghanistan and Lithuania, which gained between 9.5 and 4.5 points.

Switzerland, Luxembourg, the US, the Netherlands, and Norway led the 2002 Country Credit Ratings with between 95.3 and 92.8 points.

The lowest ranked countries were Afghanistan, Congo, Iraq, and North Korea, with between 6.7 and 8.9 points.

Israel fell from fifth to sixth place among the Middle Eastern countries in the ratings table. Israel is behind Kuwait, Cyprus, Qatar, and Oman, and ahead of Saudi Arabia, Bahrain, Egypt, Jordan, Iran, Syria, Lebanon, and Iraq.

Published by Globes [online] - www.globes.co.il - on March 25, 2003

Source Monday March 24, 3:45 PM Contact Us: Singapore 65-6415-4150

0745 GMT [Dow Jones] "Paltry" 0.4% on-year rise in February CPI reflects post-Lunar New Year adjustment in food prices, says JPMorgan Chase Bank. Seasonally-adjusted, CPI down 0.4% on-month, first fall in 6 months, with little apparent impact from 1 percentage point rise in GST (started January 1), underscoring weak household consumption trend. Looking ahead, JPMorgan expects inflation environment to stay benign. (NIA)

0616 GMT [Dow Jones] "Euphoria phenomenon" that's lifted USD since start of offensive vs Iraq unlikely to last long even if U.S. wins decisively, says head trader at foreign brokerage in Tokyo; "People think a quick U.S. victory is somehow going to rescue the (U.S.) economy, but we don't believe that story." Looks for USD to fall back to early March levels vs JPY and EUR in medium term as markets refocus on shaky U.S. fundamentals. (JOS)

0540 GMT [Dow Jones] Singapore IRS curve steepens mildly as long end rises amid continued sell-off in local government bonds; 2- to 10-year spread now at 146 bps vs 144 Friday. But traders caution scope for further steepening may be limited as Iraq war appears more difficult than earlier thought; a prolonged war likely to spark return of risk-aversion, favoring safe-haven instruments. Spread could be capped below 150 bps for time being. (SHG)

0533 GMT [Dow Jones] SGD IRS up across board tracking fall in local bonds, lower U.S. Treasurys Friday; paying focused on long end, with gains in short end limited due to lingering concerns over weak global economy. Traders say long end also soon could be under pressure if Iraq war gets tougher, as investors may resume bond-buying after recent liquidation of war premiums. 2-year offer up 1 bp at 1.09%, 5-year up 3 bps at 1.81%, 10-year up 3 bps at 2.55%. (SHG)

0510 GMT [Dow Jones] Singapore inflation still benign, but February data also show evidence of lackluster domestic consumption: CPI +0.4% on-year after 0.9% rise in January, but down 0.2% on-month. Decline mainly due to cheaper prices for food and clothes after spike ahead of Feb. 1-2 Lunar New Year holiday. Data secondary in nature and not moving markets. (SHG)

0453 GMT [Dow Jones] STI snaps four-day run-up, down 1.2% at 1310.16 midday near 1308.41 intraday low. Trader says investors shrugging off Wall Street's strong close Friday, taking profit on fears of drawn-out war in Iraq; "from the looks of it, the easy wins have been collected under the U.S.'s belt. Going forward, it's going to be difficult." Volume unusually high with 244 million shares traded. Banks all hit, while SIA down 2%, NOL off 1% on worries oil prices will renew gains. New listing Ocean Sky (O05) one of few bright sparks, up 19.6% at 27.50 Singapore cents. (ALP)

0433 GMT [Dow Jones] SGX futures falling in tandem with spot market, as going gets rougher in Iraq; SiMSCI March futures down 4 points at 160.9 on 1658 contracts, while STI March futures down 20 points at 1310 on 4 contracts. Any weakness in European markets later today may hurt sentiment further. Redeeming feature is high volume of contracts traded, suggesting traders prefer to use futures to trade market, as blue chips turn volatile. (EYG)

0413 GMT [Dow Jones] Despite fall in oil prices on hopes of quick end to war, Goldman Sachs believes prices will remain high in medium term as Iraq wasn't only reason for prices running up ahead of start of war last week. Disruptions in Venezuelan oil production, cold winter in northern hemisphere and low inventories of oil products globally are also contributing factors; "Hence, oil prices should remain a tangible source of downside risk (for) Asia," GS says. (NIM)

0331 GMT [Dow Jones] May Nymex crude may have been oversold on speculation of quick U.S.-led victory in Iraq, says HSBC oil and gas analyst Gordon Kwan; "prices could retest $30 a barrel again this week unless the military operations were extremely smooth going into Baghdad." Deteriorating situation in Nigeria, off-peak production in Venezuela and some lost output in Iraq, Kuwait to help prop up prices. (ILK)

0155 GMT [Dow Jones] MSNBC TV quotes unnamed U.S. military officials as saying special operations teams and units of CIA are in Baghdad; officials hint recent explosions there (with no air raid sirens or indications of U.S. aircraft overhead) may have been work of Iraqi resistance groups, possibly working with U.S. forces. Unclear if this is just U.S. disinformation, but it may help sustain markets' hopes for quick U.S. victory. (AXT)

0144 GMT [Dow Jones] USD/SGD drops back below 1.7700, now at 1.7697 after players take profit at early high of 1.7720, dealers say; USD/SGD likely to stay heavy, but selling momentum in local trade not consistent, or strong, as players continue to watch developments on war front, dealers say. 1.7680-1.7720 range to hold for now. (NIA)

0141 GMT [Dow Jones] U.S. officials say U.S. troops have found suspected "chemical factory" in south Iraq, but don't confirm whether it's actually believed to be chemical weapons facility as Fox TV reported earlier. If U.S. can prove Iraq had major WMD projects, it will greatly help to justify U.S. decision to go to war in court of world opinion, and reduce negative geopolitical fallout from war - so positive for USD and equities. (AXT)

0123 GMT [Dow Jones] Fund managers yet to increase risk-taking, with net USD, EUR portfolio flows confirming recent USD recovery driven more by unwinding of speculative positions than by active investor buying, says JP Morgan. Absence of investor buying in USD-rally due to uncertainty over aftermath of war, U.S. economic fundamentals; "this lack of investor follow-through is another reason to assume that the pace of dollar gains will slow." (MXT)

0119 GMT [Dow Jones] Singapore government bonds slipping in early trade, following fall in U.S. Treasurys Friday, but concerns Iraq war may not end as soon as earlier hoped for may stem falls, dealers say; 15-year yield now at 2.76%, 10-year yield at 2.36%, each up 2 bps. Interest rate swaps also up, with 10-year offer +2 bps at 2.54%, 5-year +2 bps at 1.80%. (NIA)

0044 GMT [Dow Jones] USD/SGD up at 1.7708 vs 1.7655 late Friday in Asia, carried higher by broad USD gains; but while pair expected to rise as far as 1.7720, it's looking heavy now and may well come off around that level. Players still watching Iraq war progress, market liquidity still tight, likely to result in erratic moves, dealers say; tip 1.7680-1.7720 range. (NIA)

0039 GMT [Dow Jones] STI expected to extend rally after Wall Street's surge Friday, led by banks and blue chips on hopes Iraq war will soon be over as allied troops continue advance to Baghdad; but sliding U.S. stock futures on concerns of drawn-out war may damp sentiment for techs like Chartered and ST Assembly. "How long the rally lasts will depend on how much people believe what they're seeing on TV," says trader, noting both U.S. and Iraqi propaganda in full gear. Resistance may be at 1350. (EYG)

0019 GMT [Dow Jones] TECHNICAL ANALYSIS: At 1.7705, USD/SGD's hourly oscillators have just sent sell signal implying pullback in next couple of days (bearish crossover by MACD, negative momentum divergence); USD/SGD will retest minor underlying support at 1.7680, and likely test strong underlying support at 1.7614 (February peak). Note any drop below 1.7631 would trigger double top targeting 1.7531. Immediate, minor underlying resistance at 1.7720; good underlying resistance at 1.7781 (mid-October trough). (AXT)

Economies counting on a quick end to war

Economic Watch Under the Microscope

Cheaper oil will ease inflation, but post-war rand predictions are divergent, writes Lukanyo Mnyanda

'In times of risk aversion, South Africa, which has a well-managed economy, will do better than other emerging markets'

The certainty of war gave an initial boost to the financial markets this week, the assumption being that conflict will be quick, ending in an overwhelming victory for the US and its allies.

Some economists say this is probably the best scenario for South Africa, which stands to benefit from a fall in oil prices and the resumption of global economic growth once the conflict is out of the way.

A quick war and a reduction in oil prices will ease the inflationary pressure and enable the Reserve Bank to join other major central banks in cutting interest rates, giving a boost to the local economy.

Tradek economist Mike Schussler says CPIX, consumer inflation excluding mortgages rates, could have been closer to 10% had it not been for the uncertainty of the past few months, which has kept oil prices above $30.

CPIX was running at 11.3% last month, compared with the bank's target range of 3% to 6%. The bank kept rates steady after the meeting of its monetary policy committee this week.

Schussler says if the war is quick and there are minimal disruptions to oil supplies, the return to the market of Iraq and Venezuela, whose production has been crippled by a nationwide strike, could create an oversupply and push prices all the way down to $21/barrel.

He disputes the pessimistic view that oil prices will remain around $31 for the rest of the year.

Alternatively, the war could end up being prolonged and messy, with serious consequences for growth, worldwide and in South Africa.

In these circumstances, Mandla Maleka an Eskom economist, says oil prices could hit $40/barrel, slowing the decline in inflation and delaying interest rate cuts.

A prolonged conflict will also delay a recovery in the global economy and this, together with a strong rand, will be a drag on the export sector, making the projected growth rate of 3% for the year unlikely. Exports account for 26% of economic output.

Not very clear are the implications for the currency, which has posted impressive gains against the dollar in the past 15 months.

One of the most volatile currencies in the world, the rand has been hard to predict and forecasts vary as to its likely direction.

Jos Gerson, a Merrill Lynch economist and consistent rand bull, calls it at R8 by year-end and R7.50 in the middle of next year.

Francis Beddington, economist at J P Morgan in London, calls it at R9 by year-end, compared with the market consensus of around R9.50. Beddington says the rand could reach R7.50 against the dollar within the next couple of months, citing the high interest rate differential in South Africa's favour as well as a high gold price as geopolitical tensions persist. "But [we] do not see this level as sustainable."

The consensus is that the currency is likely to remain at current levels. It has spent most of the week trading between R8.10 and R8.25.

As a net importer of oil, South Africa's current account could take strain from a prolonged conflict.

The currency could also suffer if the war slows the recovery in the global economy, leading to a deterioration in South Africa's terms of trade due to the proportion of commodities - which are sensitive to global demand - in the country's export basket.

"Historically, commodities have not only caused volatility, they have also been a key determinant of the rand's long-term depreciation - in nominal and real terms," says Beddington.

But the overall balance of payments should remain in good shape, shielded somewhat by a healthy capital account. (South Africa has emerged as a safe-haven emerging market.)

"In times of risk aversion, South Africa, which has a well-managed economy, will do better than other emerging markets," says Carlos Teixeira, emerging markets economist at Goldman Sachs in London.

Macroeconomic management has been endorsed by major credit rating agencies in recent months, with Fitch indicating that South Africa' s debt might receive a rating upgrade as early as June. These should also help attract capital.

Economists are less clear about the rand's prospects in the longer term, saying this will depend on what happens after the war.

The market's response to the certainty of war would suggest a swift recovery in the global economy, which should see a stronger dollar, if the US continues to outperform the eurozoneas expected.

This should put some downward pressure on the rand. The Reserve Bank's policy of building up reserves should also cap gains by the currency.

But there is debate on the timing of a global recovery, with some economists saying structural issues that were holding the economy back prior to the war - including concerns about rigid labour markets in Europe, balance sheets in the US and deflation in Japan - will remain.

Teixeira says the market bounce this week was a knee-jerk reaction. "The view that a quick war will lead to a massive spurt in growth is wrong.

We see [a return to] trend growth only later in the year or in the first quarter of 2004."