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T a n k e r s Industry Note

McQuilling Services, LLC. Marine Transport Advisors Ocean House ▪ 1035 Stewart Avenue ▪ Garden City, NY T: +1.516.227.5700 ▪ F: +1.516.745.6198 ▪ services@mcquilling.com

www.mcquilling.com

While McQuilling Services has used reasonable efforts to include accurate and up-to-date information in this report, McQuilling Services makes no warranties or representations as to the accuracy of any information contained herein or accuracy or reasonableness of conclusions drawn there from. McQuilling Services assumes no liability or responsibility for any errors or omissions in the content of this report. This report is copyrighted by McQuilling Services and no part may be copied or reproduced for commercial purposes without the express written permission of McQuilling Services

The Worldscale Association issues updated tanker rates, which are referred to as ‘flat rates’ at the end of each year. These values are given in a US$/metric ton format and are a fundamental component used in the negotiation of Worldscale (WS) spot rates. The WS spot rates, which are barometer for the strength of the spot tanker market, are a percentage of the flat rate, with the latter being equal to the nominal or 100% freight rate. The Worldscale Association publishes more than 300,000 flat rates for various load/discharge combinations. The updated flat rates take effect at the start of the following year, in this case 2013. In an effort to gauge the future direction of the market, we attempt to forecast a series of flat rates based on Worldscale’s “Basis of Calculation”. While the flat rates provided by Worldscale are applied to the entire spectrum of the world’s vessels, the organization uses a constant total cargo capacity of 75,000 tons. This cargo capacity accounts for cargo plus stores, water and bunker fuels. A sailing speed of 14.5 knots, both laden and ballast, consumption rates at sea and in port, load/discharge days are provided and a fixed hire rate of US $12,000/day is also employed. To calculate the increase in port charges, we assume a rise of 5% on an annual basis. Our initial port costs are derived through industry relationships with international vessel agents. At the start of October, the Worldscale Association released a base bunker price that is an average of the fuel’s price from October of the previous year to end-September of the current year. The Worldscale Association raised its base bunker price for HSFO 380-cst by 13% between 2012 and 2013 from 606.56 US$/MT to 686 US$/MT. The bunker price of US $686 per ton will be the highest level on record. The price of crude oil has a direct influence on the price development of bunker fuel and Figure 1 depicts the price development of Dated Brent versus basket of bunker prices over the last couple years. Dated Brent provides a representative gauge of bunker prices as it used to set the price of roughly 70% of the world’s traded crude oil. Looking at Figure 1, the outright price of crude oil started to come under pressure around March but an upward trajectory is still apparent. The basket of international bunker prices behaved similarly yet the decline 2012 2H was not as dramatic. The bunkers that are represented in this basket are some 6% higher year-to-date when compared to the same time period in 2011.

Figure 1: Dated Brent Spot & Bunker Prices

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WW Bunker Price Avg - right scale

US $/bbl US $/ton

Source: Energy Information Administration & McQuilling Services Bunker prices are also increasingly being impacted by reduced supplies due to greater refinery conversion capacity, which limits the output of residual fuels as refiners aim to maximize the output of more high value distillate fuels. According to data from JBC Energy, conversion capacity is expected to rise to roughly 37.9 million b/d in 2013, a 6.5% increase versus 2010. Stricter fuel and emission regulations that are being imposed on the bunker industry are also a contributing factor to rising prices. As a result of these factors, the bunker price used in flat rates has increased for 11 of the previous 15 years (Figure 2). McQuilling Services does not expect this trend to subside in the coming years and at present expects prices to average US $675/ton in 2013. Throughout our current forecast period ending in 2016, we anticipate an 11% rise in bunkers to US $750/ton as specifications tighten in tandem with deepening global conversion capacity. Cheaper natural gas prices stemming from the change in market fundamentals should reduce demand from other industries and provide somewhat of a ceiling for bunker prices. Table 2 provides our current assessment of the flat rates on selected benchmark routes. Overall, we expect the flat rate on these voyages to climb by an average of 10% compared to 2012. This is significantly lower than the 21% jump between 2012 and 2011. This is partially the

No. 21– 2013 Worldscale Flat Rate Forecast October 25, 2012

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T a n k e r s Industry Note

McQuilling Services, LLC. Marine Transport Advisors Ocean House ▪ 1035 Stewart Avenue ▪ Garden City, NY T: +1.516.227.5700 ▪ F: +1.516.745.6198 ▪ services@mcquilling.com

www.mcquilling.com

While McQuilling Services has used reasonable efforts to include accurate and up-to-date information in this report, McQuilling Services makes no warranties or representations as to the accuracy of any information contained herein or accuracy or reasonableness of conclusions drawn there from. McQuilling Services assumes no liability or responsibility for any errors or omissions in the content of this report. This report is copyrighted by McQuilling Services and no part may be copied or reproduced for commercial purposes without the express written permission of McQuilling Services

result of the base bunker price rising by 13% for 2013 figures compared to 30% in 2012. Table 2: Historical/Estimated Worldscale Flat Rates and Bunker Prices

Source: McQuilling Services, Worldscale Association When determining how the rates will impact owners’ earnings, we examined TD3, the 260,000 ton trade from Ras Tanura to Chiba. With roughly 45% of global oil demand growth forecast to be derived from non-OECD Asia this route has helped drive markets this year. The year-to-date spot average has been WS 48.3 with a daily time charter equivalent (TCE) of US $15,720/day. If we use the increased flat rate and a bunker price of US $686 per ton the TCE jumps to nearly US $25,000 per day. However, if we adjust the year-to-date spot rate to our 2013 flat rate forecast while increasing bunker and port costs earnings remain flat.

Given the cloud that has hovered over global economic growth and the resulting weakening oil demand fundamentals, this appears to be a more plausible outcome. The rise in flat rates may provide tanker owners some insulation from escalating costing bunker fuels, but the availability of tonnage across most vessel classes is likely to quell spot rate increases. In fact, higher flat rates in 2013 may provide ammunition for charterers to negotiate for even lower spot rates. In 2013, the market will continue to face the challenge of consolidation resulting from previous year’s orderbooks and a tepid global economy. This reality is likely to be exacerbated by owners trying to maximize voyage triangulations to avoid ballast sailing, given the pressure on their bottom line. However, this has the effect of freeing up vessel supply as demand is absorbed by fewer vessels, further boosting tonnage availability.

2012 2013 est % Change

TD1 46.31 51.16 10%

TD3 26.95 30.81 14%

TD5 21.05 23.55 12%

TD9 10.76 12.07 12%

TC1/TC5 26.65 29.44 10%

TC3/TD10 9.21 9.23 0%

HSFO 380-cst Bunker Price 606.56 686.0 13%