Tanker Shipping - A strong market seems remote

Tanker Shipping - A strong market seems remote

Overview

The demand situation in tanker shipping is anything but formidable. We see a mixed picture from one trading area to the next and from crude oil to products.

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As the return of a strong market seems remote, asset prices are softening further. Many new orders surface as “ECO designs”.

Demand:
The demand situation in tanker shipping is anything but formidable. We see a mixed picture from one trading area to the next and from crude oil to products. Clearly Handysize product tankers trading Singapore – Chiba have just recently escaped the negative freight rates, while the TC2 cross-Atlantic gasoline-trade have enjoyed several days on top of USD 10,000 per day (note that all rates are based on benchmark Baltic Exchange speed and consumption figures).

As a contrast to this, the benchmark average earnings for VLCCs on the routes from Middle East Gulf to US Gulf and Japan that have been under pressure throughout the year but pushed to the floor during August. The fourth quarter is traditionally a stronger one for tanker shipping and with such a vast room for improvements, the demand side have cut its work out – but prospects appear to have turned to the dark side – at least for now.

Following the very strong oil import figures from China in April and May, the import level has come off somewhat, in particular in August. However, Chinese crude oil demand remains the mainstay in the market, with prospects boosted recently by a sharp drop in inventories. China’s commercial crude inventories fell 2.5% by the end of August from a month earlier. Across the pond the picture is somewhat different, as US crude oil stocks continue to hover above 5-year range with little potential for anything noteworthy to happen. Despite the forward curve being in contango (future price above spot delivery price) it’s not steep enough to be overly bullish about a sudden increase in imports.

Although it still remains to be officially confirmed, the eventual ordering by Chinese interests of up to 50 VLCCs with an order value of USD 4.5 billion (USD 90 million each) has stirred the market. The move that will allow the world’s biggest energy consumer to take more control over its supply chain is set to be placed by state-owned shipping companies at state-owned shipyards. The top Chinese state-owned VLCC owners (world’s no 14, 15 and 16) are most widely mentioned to be involved.

The building of 50 new VLCCs is bad news for an already oversupplied market, and one questions what good it will do to the shipyards – is it merely window dressing? It will certainly not fill the capacity, so there must be more to it!

Four years ago, the shipbuilding order book reached its peak. At that time, shipyards held on to confirmed orders for a total of 11,305 vessels, according to CRSL. The orders were divided between 955 active shipyards. Today, 4 years later, the world’s shipyards are facing the wall. At the start of September, the order book stood at 4,795 vessels, whereas the number of active newbuilding yards has reverted to 538, a drop of over 40% in the past 4 years.

Faced with a lack of new business in conventional marine sectors, many builders have to explore other options in order to “stick around”. Re-focusing the yards to take care of retrofitting, general repairs or outright recycling of tonnage are amongst the new adventures that are somewhat related to newbuilding activity. But at the end of the day, a potentially large number of shipyards have to close down, which will limit the potential number of newbuildings, also with regard to tankers.

Supply:
The 1996-built, doubled-hulled Suezmax crude oil tanker Hellespont Trooper has reportedly just been purchased for USD 11.7 million (source: Intermodal). With a current demolition price at USD 420 per ltd, that could return USD 9.3 million to the owner (according to VesselsValue.com). The vessel, with a remaining 6 years of commercial life (average scrapping age of Suezmax tankers being 22 years), is thus valued at USD 2.4 million for on-going trading (USD 400,000 per year).

Three years ago such a vessel was valued at USD 34.5 million, which corresponded to a value for the remaining commercial life at USD 2.9 million per year, considering a scrap price of USD 8.1 million. It is quite astonishing to see that the deteriorated belief in the future market has shaved off 86% of the on-going trading value of this representative Suezmax tanker.

Over the past two months the product tanker fleet has contracted, as more tankers have been scrapped or removed from the fleet than have been delivered into it by means of newbuilt tonnage. Following that upbeat news, the current status is that the product tanker fleet has grown by just 1.2%.

While the new contracts match the deliveries in DWT, it is noticeable that the last three orders (3 x 2 vessels; 2 MR and 4 Handysize), settled in July and August were announced to be so-called ECO-ships, all with a claimed bunker fuel saving of 5-7 tons as compared to the average consumption of the current fleet. According to the announcement, this should lower cost by USD 2,000-4,000 per day, calculated at normal service speed of 14 knots. One ton of 380 CST costs USD 625 in Rotterdam.

These new contracts have presumably been made on attractive financing conditions and they should, as such contribute positively to a lowering of the involved owner’s tanker fleet-wide average costs. Note that the ship finance market is increasingly a place only for the top owners, with whom the banks still want to do business – if they want to do any shipping business at all.

The product tanker order book to active fleet ratio now stands at 10.9%. The same ratio for the crude tanker segment stands at 13.1%.

Outlook:
Led by falling demand for oil products in the US, MR product tanker earnings in the Atlantic basin have been particularly poor. In first half of 2012, US gasoline imports dropped by 22% as compared to the same period last year. As the PMI-index for the important US manufacturing sector has now been below the key 50-threshold for three months running, the outlook remains poor for US product demand.

US ISM Manufacturing Index has been down three months in a row from June to August, the effect of QE3 is set out to be the pivotal element that should provide improved economic conditions and perhaps also stronger manufacturing and thus higher oil product import demand. The response to QE3 came instantly, with September numbers for the ISM index where both the Composite and the New Orders sub-indicator returned to a growing trend from the contracting one.

As has been seen so many times before, the potential positive drivers that could benefit the crude and oil product markets could be coming from geopolitical issues that ignite uncertainty about the supply of oil. Such a potential driver has, however, not been taken into the equation in our below forecast!

Charter rates for crude and product tankers remain uninspiring and sideways moving as has been the case throughout the year. Product markets appear currently stronger West of Suez than East of Suez; a pattern that is likely to stay around in the shorter term.

BIMCO expects that average earnings for all the three crude oil tanker segments will stay around USD 10,000-20,000 per day.

Handysize and MR clean rates are expected to enjoy a bit of tailwind driven by a better performance in the manufacturing sector, primarily West of Suez. Freight rates are suggested to be around USD 4,000-12,000 per day. BIMCO expects earnings on benchmark routes for LR1 and LR2 from AG going East to endure slowly sliding rate levels along the seasonal pattern in the interval of USD 1,000-11,000 per day.

in Copenhagen, DK

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