Tankers and the economy

Aug 21 2019


Will an economic slowdown threaten the tanker market?

The ‘Economist’ recently ran an article about the inverted yield curve. This is a situation where the yield on 10-year government bonds falls below the yield on two-year bonds. This happened last week in both the UK and the US.

According to historians, this is an ominous sign, Poten & Partners said in a comment piece.

Over the last 50 years, an inverted yield curve preceded each of the last seven recessions in the US. The reasoning is that when long-dated bonds yield less than short-dated bonds, the market expects interest rates to fall sharply in the future, which would happen if the Federal Reserve was responding to an approaching recession.

If a recession is imminent, what will happen to the tanker market? After several dismal years with low freight rates, tanker owners were just getting ready for a few good years, driven by a combination of factors, such as reduced ordering and the introduction of new regulations (IMO2020 and ballast water treatment systems.

Will a slowdown in global GDP, triggered by a recession in some of the world’s key economies derail the recovery in the tanker market before it even starts?

To answer that question, Poten said it will  review some of the most recent recessions in history and see how they impacted the tanker market.

The most recent global recession was in 2008/2009. During this period, the world economy contracted, global oil consumption declined from 87.2 mill barrels in 2007 to 85.8 mill barrels per day in 2009 (-1.6%). However, global oil trade (export/import) declined by 5.4% over the same period.

Tanker market impact is well known: VLCC rates on the MEG/East route plummeted from an average of $93,000 per day in 2008 to $32,000 per day the following year. While the decline in oil demand and trade was an important factor in this tanker rate decline, it does not explain the sheer magnitude of the fall, nor does it explain why the market remained in the doldrums until 2015.

The explanation is on the supply side. When the global economic recession hit in 2008, the tanker market had just experienced a five-year period of unprecedented growth and prosperity. Anticipating continued good times, tanker owners had filled the orderbook with more than 2,000 tankers(>10,000 dwt), representing 48% of the fleet. Their deliveries created massive overcapacity, which delayed the tanker market recovery until 2015, even though oil and tonne/mile demand returned to growth in 2010.

The previous global slowdown was in 2001. GDP growth in many OECD countries slowed dramatically from 2000, but unlike in 2009, the global economy did not contract. The impact on developing countries like China and India was limited. China’s GDP growth in 2001 was 8.3%, only marginally lower than the 8.5% of 2000. Oil demand continued to grow from 2001 to 2002 (+1.2%), but global oil trade stagnated (-0.05%).

VLCC spot rates took a hit, coming down from $36,000 per day in 2001 to $22,000per day in 2002. Because the tanker orderbook was relatively modest (20% of the fleet) and oil demand recovered quickly, tanker rates swiftly rebounded.

From 2002 onwards, China’s GDP growth accelerated every year, until it peaked at 14.2% in 2007, fuelling an incredible shipping boom that we now refer to as the ‘Super Cycle’.

What can we learn from the above two examples in terms of how a possible economic recession in the US and Europe could impact the oil and tanker markets? We expect that the impact will be relatively modest, more like the 2001-2002 period than the 2008-2009 time-frame, ie less dramatic with a relatively quick recovery.

One reason is the significant increase in energy productivity (the amount of economic output for each unit of energy consumed) of the global economy over the last 15-20 years. This means that lower GDP growth will have far less impact on energy and tanker demand. There are also supply-side factors driving this more optimistic outlook. The tanker orderbook is relatively modest (8.5% of the fleet) and there are a fair number of older vessels that are potential scrapping candidates.

Sharply higher bunker prices, as a result of IMO 2020, combined with required investments in ballast water treatment systems could push owners to scrap rather than upgrade older, less efficient tonnage in the face of market weakness, contributing to a quick turnaround, Poten said.

 



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