Tanker Shipping - Strong demolition prices and volume supports an uneventful market looking forward

Tanker Shipping - Strong demolition prices and volume supports an uneventful market looking forward

Overview

Demolition prices have been on the rise since late last year and recently reached the same high levels seen in the beginning of 2012. In two of the major demolition markets, India and Pakistan, the positive development started around October 2013 after a year of more or less status quo. In China, also a large market for demolition, development has been the opposite, with slowly declining prices since the beginning of 2013.

DEMAND:
As expected, Q2 has turned out to be less “action-packed” than Q1. For all tanker segments, rates have side-stepped, with a few noticeable exceptions. Handysize product tankers lost steam unexpectedly and fell to USD 5,000 per day, whereas in the final weeks of May, Suezmaxes firmed to reach USD 22,000 per day. Finally, VLCCs disappointed – slipping below the USD 10,000 per day mark to end seven significant months with average earnings at USD 30,081 per day from October to the end of April.

The tripling of gasoline imports, primarily into the US East Coast during April and May as they prepared for the “driving season”, once again failed to change fortunes in the Handysize/MR segment. Perhaps this once so important season is no longer relevant, with quickly changing trades originating from the export of US oil products.

The export of crude oil from Africa is at the epicentre of the crude oil tanker markets, partly due to the lack of Libyan supply and partly due to lack of US demand. Longer hauls from West Africa to Europe that have stepped in to bridge the gap that has opened up by the loss of short-haul cross-Mediterranean crude oil shipments have been positive for the market. On the other hand, the loss of US demand has been significant, with a sharp decline since 2010.

For Asian demand, the only way is up. So far in 2014, crude oil exports from Africa are up by more than 200,000 barrels per day (bbl./day) compared to 2010 levels, approx. 10%, according to EIA. Higher oil demand and China’s quest to diversify its sources of supply have made this trade lane more important. During January-April 2014, China has moved to the top of the list of African crude oil importers, taking 22% of all, equal to 1.2 million bbl./day. The above developments translated into a dynamic and positive crude oil tanker market earlier in the year. Going forward, the development on these trades will decide the prosperity of the market.

China expanded its refinery capacity by 0.9m bbl./day last year and EIA expects capacity expansion of 0.5m bbl./day this year.

SUPPLY:
Demolition prices have been on the rise since late last year and recently reached the same high levels seen in the beginning of 2012. In two of the major demolition markets, India and Pakistan, the positive development started around October 2013 after a year of more or less status quo. In China, also a large market for demolition, development has been the opposite, with slowly declining prices since the beginning of 2013.

In India, the Rupee has traded below INR 60 against the US Dollar for some weeks now, fuelling the end-buyers’ desire to fill their pots. The strengthening of the Rupee follows the election of the pro-business candidate Mr. Narendra Modi, which has sparked even more optimism in the market. Even tankers, which normally go to Pakistan, are being cleaned now to comply with the safety restrictions at India’s ship recycling yards. This goes on as owners aim to take advantage of the substantial premiums on offer in India, where the price tag right now is USD 500 per LDT. A steady flow of ships to be demolished has meant a firming market so far this year.

The delivery of 38 product tankers has contributed to a product tanker fleet growth of 0.9% for the first 5 months of 2014. Twenty-nine of these were MR tankers – all but one South Korean-built. Seventeen product tankers of 645,000 DWT have been demolished, of which none were MR tankers. 2014 is surely “the year of the MR”.

Contributing to the filling of the vacant 2016 slots at the yards have been the 41 new product tanker orders (2.6 million DWT) signed in the first five months of 2014. During the same period last year, as many as 127 units of 8.4 million DWT were ordered; quite a cooling of the once red-hot market. There is a clear sign from freight rates that hesitate to pick up as well as a feeling that most of the upside in this segment may already have been captured by the orders placed last year at lower newbuilding prices.

Fleet growth in the crude oil tanker segment has now slowed on a year-to-date basis by -0.1%. Contributing to this on the demolition side has been the sale of five early 90s built VLCCs for demolition.

OUTLOOK:
As the freight market still fails to deliver, the ordering of new MR ships has also fallen off a bit. Newbuilding prices have hardly moved in 2014, with the price for a South Korean-built MR currently at USD 37 million as compared to a Chinese build quoted at USD 34 million.

All eyes are on US oil production and oil product exports these days, but have the biggest changes arrived already, with only minor adjustments to follow? According to the EIA, that could very well be the case for the oil product trades. The most recent outlook to 2040 shows oil product imports will be flat and oil product exports holding the current level before increasing in 2020. The future may already have arrived.

As regards the US crude oil net import situation going forward, the gap will narrow further in the coming years, according to EIA. Moreover, EIA expects an unchanged level of imports from 2016-2040 at around 5 million barrels (mb) per day – quite a change from 2004-2007 where the US net imports of crude oil peaked at 10 mb per day.

For June/July, BIMCO expects earnings for all the three crude oil tanker segments to stay in the region of USD 10,000-20,000 per day.

In the product tanker segment, BIMCO expects earnings on benchmark routes from AG to Japan for LR1s to soften a bit, but stay around USD 7,500-14,000 per day, with LR2s earning a bit more at USD 10,000-18,000 per day. Handysize rates are set to improve from the recent bad performance around USD 5,000-12,500 per day, with MR average rates expected to remain firm in the interval of USD 8,000-12,000 per day.


in Copenhagen, DK

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