Minutes Worldscale Committee meeting, 3 July 2012

INTERTANKO London office; 30 Minories, London, EC3N 1DD

Attendance :

Tim Horne (Chairman) / Teekay Shipping (UK) Ltd., Chairman
David Allen / St. Jamess Chartering Ltd
Martin Baldock / Scorpio Ship Management
Tomoaki Ichida / Mitsui O.S.K. Bulk Shipping (Europe) Ltd
Mark Linham / Eletson Maritime Limited
Erik Ranheim / INTERTANKO Oslo, Secretary
David Chapman / OSG Tankers (UK) Ltd Invited guest
Petter Haugen / DnB Invited guest

Katharina StanzelINTERTANKO London,Managing Director

Joe AngeloINTERTANKO WashingtonDeputy Managing Director

Michele WhiteINTERTANKO London Legal Counsel

Lunch with Management Committee of the Worldscale Association (London) Ltd.

Mariella Bottiglieri Giuseppe Bottiglieri Shipping Co Sp and Justin Murphy ex AET UK Limited apologized that last minutes obligations prevented them from attending.

  1. The expanded mandate of the WS Committee to

look into commercial issues and membership of the

WS Committee

The committee had a detailed discussion of the commercial considerations that impact tanker operations which were raised at the INTERTANKO Council meeting in Singapore. These included proper promotion of speed optimization, rising fuel costs, broker’s fees, certain charter party clauses regarding purging and cargo heating, and possible decoupling the fuel costs for the commercial transactions.

The discussions and outcomes of those discussions for proper promotion of speed optimization are contained under agenda item III, for rising fuel costs and decoupling fuel costs from commercial transactions under agenda item II and for broker’s fees and certain charter party clauses under agenda item IV.

The issues of expanded terms of reference, new name and expanded membership of the committee whereas not extensively covered due to time constraints, but the sentiment is that the name of the Committee should be changed and the terms of reference and membership expanded. Proposals for a new name and for a relevant size of the Committee are, therefore, welcome.

II.Are earnings affected by the bunker price used by the
WS association being different to the market price and how can
this be taken care of

The WS rates were perceived to meet the basic requirement of the WS system, to provide comparable rates for different voyages. However it was also noted that WS sometimes could work to the detriment of the market and cause opacity in the market. The market was perceived to be imperfect and has changed to the disadvantage of the owners, but for reasons not related to the WS system.

Because the WS rates are only updated once a year and calculated using the 12 months average bunker price ending 30th of September the previous year, the pricing considerations underlying the WS rates may often be distorted.

At the commencement of the new year the flat rate should be adjusted through the percentage applied to it to ensure an equivalent freight/TCE is generated; however, variations between the calculation’s embedded bunker price and the actual prevailing market price, can mitigate this to the detriment of the owner.

The underlying assumption of roundtrip voyages built into the WS model can also affect comparability given the trend to triangulation and voyage combination prevalent today.

For MR tankers a great deal of the voyages appear to be fixed on lumpsum rather than WS basis, in particular in Eastern markets. However lumpsum was not seen as a panacea to avoid possible problems caused by using WS as fixing on lumpsum basis introduced other difficulties (volume of calculations required to effect comparability).

Another way to mitigate these issues may be to fix on TC trip basis, as in the dry cargo market; the Committee agreed that making this change would require significant time and effort and an alignment in the tanker market that is probably not there today.

It could also be possible to decouple bunker costs from the freight rate to treat it as a separate cost element. It was, however, questionable if this would be accepted in the market and it was questioned whether it would actually increase opacity.

It was also questioned whether the current standard 75,000 dwt tanker consuming 55 ts at 14.5 knots where still the optimal ship to use, which would be raised with the WS management Committee during lunch later in the day.

Development of the on-line WS system wouldallow greater flexibility and speedier amendment and could be offset by the cost savings of not printing the hardcopy Wordscale book

In general it was felt that there are reasons for revisiting the whole basis of the WS system. However, there was an expectation that there would be resistance to changefrom the London Tanker Broking Panel.

It was recognised that more frequent changes could mean increased subscription rates to the WS rates, but that this would still be a minor costs compared to the problems owners were dealing with in the market.

After evaluating various ways the volatile and high bunker costs could be dealt with, it was concluded that possible decoupling the fuel costs from the commercial transactions was seen as unrealistic at this stage. Instead it was decided to request the WS Association to do more frequent changes in the WS rates.INTERTANKO should request from the WS Association’s to adjust bunker prices at least twice instead on once a year.

  1. Speed optimisation

Speed optimisation was described to be the most efficient means to deal with the current depressed market conditions. In this respect WS was seen a secondary issue.

Speed reduction appears to be extensive in the market and tracking done by DnB Research revealed that as much as 70% of the fleet is trading at reduced speed. However whereas less than half appear to trade at optimum speed, there will also be some that for specific reason will opt to trade up to full speed for specific reasons for example to meet a lay-can or trading opportunities.

It was agree that optimising speed would be to the benefit to all stakeholders, it is a waste to trade at full speed in a market with surplus tonnage and at the same time as there is a strong pressure on shipping to reduce emission.

In general the high fuel costs are a direct reflection of the high oil prices and have completely changed the economics of the market and resulted in widespread slow steaming. The Committee recognised the challenges caused by the high bunker costs, but also accepted that slow steaming has contributed to tightening the supply situation in the market.

The tanker fleet normally trades at full speed only during short peak periods when demand increases for unforeseen reasons. The ability to vary speed ensures a dynamic market that can meet such peak, at the same time as earnings may to some degree be sustained and emissions reduced if tankers optimise speed in slack periods.

Technical issues can be managed to allow for slow and ultra slow steaming, but sometimes at a costs some owners may not have the capital to invest in under current market conditions.

It was recognised that the effect of slow steaming is difficult to measure and that the benefits may vary both between ships and segments. At the same time there are some physical laws that apply and most owners can probably use the same model as long as they can adjust the figures to their own ships, but this needs to be tried out and documented. It was however emphasized that there are probably more similarities than differences between the different ships and segments.

It was agreed that INTERTANKO can contribute to educating the market about the effect of slow steaming. Even if there is widespread use of reduced speed in the current market, there does not appear to be a common understanding of the issue and sharing of information may be useful.

When modelling slow steaming, the model should be easy to use and at the same time the ship operator should be able to enter his own variables as every ship is slightly different. A model developed by INTERTANKO allows for this.

With the introduction of SEEMP, all owners need to taken a proactive and analytical approach to emission reduction and thus also speed reduction.

  1. It was agreed that INTERTANKOpro-actively present the issues related to slow steaming in different ways such as in the weekly news, presentations and when dealing with stakeholders; the Secretariat will work with the Committee to develop appropriate materials and a publicity plan (keeping the content clear and concise)
  2. Materials to be developed to place a charterer based context ($/mt) on the benefits of slow steaming.
  3. INTERTANKO should promote its slow steaming model and adapt it to an app form if possible.
  1. Market distorting factors

There was agreement that a number of market distorting factors risk creating imbalances in the market in the charterers’ favourCharterers, who today are ascendant in the market, are mainly large companies which also to a great extent have the broking community as their extended chartering arm.

The owners pay the brokers’ fees butfor the most part do not exert any influenceover them. A further issue is that today’s high bunker price means that brokers are receiving reasonable commissions due to what is an owner’s cost item.Brokers can have a great influence on which ships get which cargo for their own reasons without giving all owners the same opportunity to compete for the cargo. This may make the system more inefficient.

However, charterers do not appear share this concern and this is not an issue that OCIMF is willing to discuss because their mandate relates to safety and environmental issues, not commercial issues.

This imbalance and the way the market works today was not considered sustainable.

With regard to certain c/p clauses e.g. purging, cargo heating the Chairman of the Documentary Committee, David Chapman, advised that recommended clauses were under development and it was agreed the two chairmen will liaise between the two committees.

It was agreed that INTERTANKO should pursue contact at high level with brokers to make them aware of member’s concerns about the market and their role within it. It was also accepted that creating real change will be difficult but it was felt that this had to be tried.

The committee agreed that the Secretariat should develop a communication plan and target list for liaising with the other stakeholder in the markets, mainly the broker and the charterers, to communicate the concerns about the distortion in the market and that the current situation is not sustainable. This plan will be recommended to the Executive Committee and followed up accordingly.

  1. Next meeting

The Chairman indicated that he felt it would be beneficial for the Committee to have another meeting, by conference call if appropriate, prior the INTERTANKO Executive Committee meeting on September 6 to further discuss the above issues and the outcome of the lunch with the Management of the Worldscale Association discussed below.

The committee agreed that the Chairman and the Secretariat would discuss if such a meeting was possible and advise the committee members accordingly.

Lunch with the Management of the Worldscale Association

Venue: Apex City of London, No 1 Seething Lane, London EC3N 4AX

Attendees from the Worldscale Association

David InsoleClarkson

NicoBorkmannACM Shipping

Stephen KelleySimpson, Spence & Young

John HaleE. A. Gibson Shipbrokers

Charlie FowleGalbraith’s

Ian McCarthyGeneral Manager, Worldscale

Robert PorterManaging Director, Worldscale

Referring to the above minutes there was a wide discussion about how the WS system was perceived to work in the market, that is was less used in the MR business and also less used in Asia.

According to the Worldscale Association, there is hardly any complaints or comments to the Worldscale system, except from the INTERTANKO Worldscale Committee. The charterers never had any comments to thesystem at all. A survey made by the Association showed that 75% still wanted to retain the WS book. The costs of printing the book was not seen as a high costs item. There was no plans for any basic changes of the system, except to speed up the on-line response as it was at times perceived to work to slowly.

INTERTANKO questioned whether the 75% support for the book version correct was and the response was that if the WS Association did away with the book they would lose subscribers.

The WS Association did not appear to feel that the use of WS was reduced in the favour of for example lumpsum rates.

There was a long discussion on whether to go over to an on-line bases WS system without printing the books to make the system more flexible to allow for changes in the market. Even if some find the Worldscale books convenient, a change to an online system with more frequent updates may be relatively easily accepted in the market. It was also pointed out that a main reason why the book is so popular was that their online system is so slow. The WS office had found it hard to pinpoint why the system worked so slow.

All in all the Worldscale Association felt that the WS system and system worked and took care of the basic purpose to provide comparability of rates to different ports. However they emphasised that they were open to proposals for changes if there were specific problems.

From the INTERTANKO side it was passed on the INTERTANKO WS Committee had concluded that a twice or four times a year revision instead of an annual of the system was wanted. The WS Association said that they wanted to look into the practicalities of this.

INTERTANKO also asked if it could be possible to lower the speed of the standard ship from 14.5 knots to 13.5 knots.

The current model ship which is used today was at the time decided on the basis average of the tanker fleet in the relevant tanker segment using WS. However it was felt by INTERTANKO that this standard ship and the basis for calculations could now be revisited. The WS Association said that they had revisited this quite recently and found this still to be pretty much the average.

The Broker Commission was also discussed and it was taken out of WS system because of anti-trust concerns in the US.

INTERTANKO will contact the WS Association on a formal basis to request them to consider:

  • A more frequent update of the WS rates based on an on-line system
  • A review of the standard tanker and the basis for calculations
  • Why the WS system is not used to such a great extent in some part of the word and in some tanker segments

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Minutes Worldscale Committee Meeting London - 3rd July 2012 Page 1 of 6