A Winter season that turned the market upside down is soon coming to an end. All eyes were on product tankers, thinking “would this be the beginning of something beautiful in terms of higher earnings?” No one really paid much attention to what was already in the making in the crude oil tanker sector.
A Winter season that turned the market upside down is soon coming to an end. All eyes were on product tankers, thinking “would this be the beginning of something beautiful in terms of higher earnings?” No one really paid much attention to what was already in the making in the crude oil tanker sector before the fire that started amongst the VLCCs spread like a wildfire to Suezmaxes and finally included Aframaxes too, with earnings achieving USD 70,000-80,000 per day. Whilst the VLCC market was mostly driven forward by increased Asian/Chinese demand, the strength in the Suezmax and Aframax sector originated from North Sea/Mediterranean/Black Sea. Asian demand for West African oil helped buoy the market too, as it more than offset the lack of US imports from the same region.
The best of it all is that the party is still ongoing, with no sign of hangovers yet at the end of January. Certainly some Q4 action is guaranteed in the crude tanker sector, but Q4-2013 made us smile more than usual. Overcapacity is severe, if you look at how poorly the fleet is utilised, but as we have seen in dry bulk, windows of opportunity may occur even in those markets if and when the pace of new ship deliveries slows down. In Q4-2012 the VLCC and Suezmax fleets were both growing at 6%, whereas in Q4-2013, the VLCC fleet grew only by 2% and Suezmaxes by little more than 4%. Aframax crude oil tankers, which have been out of fashion for so long now, experienced negative fleet growth for the last 10 months of 2013. The combination of slow steaming, low fleet growth, long hauls and demand shocks have tightened the markets, giving all the aces to owners and operators, with charterers for once left with few options to secure their cargo programme requirements.
In the product tanker market the December upswing was less impressive then the crude oil tanker market, with freight rates in the USD 12,000-18,000 per day region. The demand for heating oil in the north-eastern part of the US – where stocks were low – supported the markets in January too, as the temperatures dropped sharply. According to EIA, heating oil is to some extent being substituted by natural gas, taking out some of the positive knock-on effect to shipping from increased heating demand.
Several months ago, many owners expressed the view that an orderbook of around 200 MR units was still manageable for the market to absorb while remaining in the chase for higher earnings. At the end of January, the MR order book stood at 273 units, as more than 80 new orders have emerged in the market since the last BIMCO SMOO from early December 2013.
BIMCO has previously stated that a massive new inflow of new orders may jeopardise the product tanker market on its course towards an improved fundamental balance, as fleet growth has come down significantly during 2010-2013.
With the fleet once again growing more quickly, it needs a very strong demand side to provide the needed employment, with supply management in a very important supporting role.
Finally, we can detect a note of optimism in the crude tanker segment, which has been all too rare over the past couple of years. In addition to a strong freight market, the demolition market has contributed to the success story too. As demolition picked up in the second half of 2013, year-on-year fleet growth arrived at just 1.9% at the end of 2013 for the total VLCC fleet. In H2-2013, 14 VLCCs were sold for demolition, while just nine units were delivered.
Building on the positive trend, the pace of newbuild deliveries has been slow in January. Total oil tanker fleet growth has been limited to just 0.2%.
Looking a bit further, fleet growth is now picking up in both the crude oil and oil product tanker segments as compared to 2013. Both segments are deemed to face a lower level of demolitions, while the product tanker segment is also going to see an increased amount of tonnage being delivered throughout the year.
The structural changes in the product tanker market still paint a pretty picture, with refinery expansions going on in the Middle East and Far East.
Who will come out on top? Will MR or LR be the winner? Maybe both, maybe neither… The jury is still out on this one, with sound arguments which could take it either way.
Going forward, we expect the focus to be on charterers’ preference for modern tonnage, with the unwritten bar set at 15 years as maximum age. However, this is not likely to result in strong demolition activity amongst elderly tonnage. There are still charterers who hire equally qualified but older tonnage, so you could say it is more of a two-tier market rather than an elimination race.
In terms of capacity, ships above the age of 15 years amount to 11.9% and 12.6% of the overall crude oil and product tanker fleet respectively. Moreover, the idea of bringing the market back to balance in a fast-forward mode by removing these ships seems unlikely. If we focus on the VLCC fleet only, an age limit of 15 years would single out 60 units as “over-aged” (9%). This would bring the fleet size back to the level at Summer 2011. For MR product tankers, there are 124 out of 1,064 above the age of 15 (11%).
The multi-million dollar questions is then – how can we bring back consistently healthy rates in the freight market? By increasing demolition activity? Maybe, but slow steaming holds the key. If the VLCC fleet would continue to run at an average speed of 13 knots instead of 16 knots, increased demolition activity would most certainly make a difference, because the speed effect is actually having a bigger impact on the supply side than demolition. The trouble is that speed reduction is not permanent – demolition is.
For February/March, BIMCO expects earnings for the VLCC segment to settle in the region of USD 10,000-25,000 per day. Suezmax crude oil carriers are also seen down from the recent peak to reach USD 12,000-22,500 per day, with the Aframax crude segment to follow suit at USD 10,000-20,000 per day.
In the product tanker segment, BIMCO expects earnings on benchmark routes for LR1s and LR2s from AG to Japan to stabilise at USD 5,000-10,000 per day. The Winter season is soon over, affecting Handysize rates towards a level of USD 10,000-15,000 per day and MR average rates at USD 8,000-13,000 per day.