Easy on the newbuildings

May 11 2018

Poten & Partners has joined the growing band of shipping analysts and others questioning the wisdom of the relatively high ordering rate thus far this year, which has continued up to the beginning of May.

In the first four months of 2018, tanker rates were depressed. Products tankers, in particular MRs, fared better than crude oil tankers and in both sectors, the largest vessels - VLCCs and LR2s - underperformed the most.


VLCCs suffered from an influx of new tonnage and subdued demand growth, due to the continuing OPEC production cuts. Rising US domestic production has also cut into long haul tanker demand, as local refiners are using more domestic crude.


In the face of rising Canadian pipeline imports, seaborne US crude imports from the Middle East have declined disproportionately. Increased crude exports from the US Gulf have mitigated this development to a certain extent, but not entirely, Poten & Partners explained.


The short term tanker market outlook remains negative, as OPEC has signalled a continuing commitment to its production cuts, while newbuildings continue to be delivered at a steady pace.


Up to 1st April, nine VLCCs, 14 Suezmaxes, 16 Aframaxes/LR2s, six Panamaxes/LR1s and 12 MRs were delivered. Another 200 vessels are scheduled to enter service during the remainder of this year, including 46 VLCCs and 33 Suezmaxes.


Poten & Partners said that there were a number of reasons why ordering has continued, the main ones being growth, fleet replacement and asset play.


Looking at the VLCC situation, since November last year, 31 have been ordered to the end of March, 2018 with several more since. Of these, around 11 were contracted by various Chinese interests and not surprisingly went to Chinese shipyards.


The second largest group identified as ordering VLCCs were the Greeks. All of the nine Greek backed orders to the end of March went to South Korean yards. Some of these were driven by fleet replacement needs. South Koreans also placed orders in domestic yards and three Japanese owners contracted in Japanese yards.


As is almost always the case in shipping, the reasons for ordering makes sense from an owner’s own individual perspective. Some of these were cited as replacing an ageing fleet, taking advantage of historically low newbuilding prices, or the need to position themselves ready for perceived future demand growth and thus higher rates.


Obviously, the problem arises if too many owners have the same idea at the same time and the expected market improvements don’t materialise. We may not be at this stage yet, Poten & Partners said, but the ingredients are there, as many owners are positive about the market’s medium term outlook and many of them have enough resources to make a down payment on one or more newbuildings.


The increase in scrapping is encouraging and this will obviously reduce the impact of the delivery influx this year. However, as long as the market remains oversupplied, owners would benefit from taking one step backwards and taking stock before committing to more newbuildings.


Adding to this scenario, the arrival of some investment funds looking for a home, due to the low newbuilding prices is troublesome. This is not what we want just now, Poten & Partners warned.


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