Different takes on crude tankers

May 12 2017

Recovery in the crude tanker shipping market is not expected until 2020, as weak trade growth and a bloated orderbook limit any rate recovery.

However, the timing of any market upturn will be heavily influenced by the level of scrapping, according to the latest edition of ‘Tanker Forecaster’, published by shipping consultancy, Drewry.

The ongoing overcapacity in the tanker market is expected to persist this year, due to a sharp increase in vessel deliveries. Although deliveries are projected to decline after 2017, given a weak demand outlook, hope of recovery will hinge on the extent of scrapping activity, which will be influenced by forthcoming IMO regulations on ballast water treatment.

Scrapping activity has not increased thus far, but Drewry said it expected activity to gather momentum towards the end of this year, once the new ballast water convention is implemented. Since some owners might bring special surveys forward, the real impact of this IMO regulation will not be seen until 2018.

In the existing fleet, there are about 20 mill dwt aged 19 years or more, for which the fifth special survey is due during 2017-22. Drewry assumed that all of these vessels will be scrapped during 2017-22, as unattractive freight rates, poor employability and the additional costs associated with complying with the forthcoming IMO regulations, will force owners down this road.

Additionally, there are about 367 vessels (of 67 mill dwt), for which a fourth special survey is due during 2017-22. As these vessels are currently in the age bracket of 14-19 years, owners will have to decide whether to scrap before they are due for their next survey, as they will have to incur the additional cost of fitting ballast water treatment systems (BWTS), as well as scrubbers required to comply with IMO regulations on sulfur limits.

If it is assumed that about a third of these vessels are scrapped during the forecast period 2017-22, the recovery in tanker freight rates will not start until after 2019.

“We expect the market to start a gradual recovery from 2020. For any recovery before 2020, demolitions need to be strong enough to keep fleet growth slower than demand growth,” said Rajesh Verma, Drewry’s lead analyst for tanker shipping.

Meanwhile Gibson said in a report that the lull in new tanker orders last year coupled with accelerating pace of deliveries has reduced the size of the orderbook. This raised hopes that the rapid growth in fleet size witnessed currently will come to an end in 2018/19.

However, the dynamics of the newbuilding market are starting to change again this year, with a notable increase in shipowners’ appetite for new VLCCs. Thus far this year, around 30 VLCC orders have been confirmed versus just 13 for the whole of 2016.

Ordering activity in other tanker categories remained restricted, although some modest gains were seen in the Aframax and LR2 sectors. Nevertheless, Gibson thought that a number of owners (not just VLCC owners) are considering investment in new tonnage and are actively talking to shipyards.

This has been to a large extent driven by low asset values. Newbuilding prices across all sectors declined last year on the back of the turmoil in the shipbuilding industry, which was hit by a prolonged period of low ordering activity in a number of shipping sectors, including tankers.

As a result, STX shipbuilding filed for a court led restructuring, whilst many leading shipyards are going through cost cutting, consolidation and restructuring. 

Depleted orderbooks combined with challenging financial conditions have forced shipbuilders to compete even harder, pushing prices lower and lower. As a result, this year tanker newbuild values reached their lowest levels since late 2003/early 2004.  

The latest wave of new tanker orders has occurred against deteriorating trading conditions. Spot earnings in the product tanker market have been very weak for quite some time, frequently falling to or even below the level of fixed operating expenses. However, the crude tanker market fared better, VLCCs in particular; yet, even here earnings so far this year have been notably lower relative to 2016.

Paddy Rogers, Euronav CEO, spoke against the latest flurry of VLCC orders, suggesting that these orders were not needed in the current challenging conditions. However, newbuilding prices appeared to be too attractive to resist.

Apart from low price levels, ordering a new tanker now offers an additional benefit – delayed delivery, due to a lengthy construction period, which will enable the owner to take control of the asset once the current phase of rapid fleet growth is over and/or is approaching its end.

Furthermore, owners making a decision to order will have the flexibility to have their tonnage prepared in a most efficient and practical way for the approaching key legislation - the Ballast Water Treatment Management Convention, which will come into force in September this year and the 0.5% global sulfur cap for marine fuels, effective 1st January, 2020. 

There is clearly some sound logic behind ordering a tanker now, Gibson said, which suggested that firmer interest in newbuilding tonnage is unlikely to disappear anytime soon. However, access to new finance remains a problem, as it is more challenging to put the case for new investment while returns in the industry are weak and/or are deteriorating.

Elsewhere, VesselsValue has released a survey of the latest newbuildings.

VesselsValue Deals database showed that Greek owners have placed 35 orders for new bulkers and tankers since the start of 2017, followed by US with 14, Singapore with 10, Norway with eight and The Netherlands with six vessels.  

Many in the shipping industry are worried that there is an imbalance of supply and demand between the number vessels currently on the water and the amount of cargoes.

This situation does not look to improve in the near future, as there are 426 tankers due for delivery this year of 32 mill dwt, 294 in 2018, 96 in 2019 and 26 in 2020, at the time VesselsValue’s report was compiled.

Over the last five years, a major source of finance & investment in the newbuilding market came from the private equity sector who invested heavily to capitalise in the post-crash market downturn.

Today, the preference from the private equity sector is to invest in tonnage already delivered and on the water so that an immediate return on their investment can be realised.

This led to a lack of newbuilding finance available and resulted in a gap in deliveries at the major shipyards and therefore increased appetite to take orders.

In early 2017, the cash rich Greek community took advantage of this, securing a number of orders at competitive prices.

As we progress through 2017, yard capacity has reduced but continued buying demand from the private sector remains. This is one of the major factors that has led to the increase in newbuilding prices over the past five months, VesselsValue said. 

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