BELGISCHE MARITIEME LIGA  vzw.
LIGUE MARITIME BELGE  asbl.

Koninklijke Vereniging - Société Royale

Dossier

 

Tankers face an uncertain future


Just when you thought it could not get any worse for the tanker shipping industry, the US is re-imposing sanctions on Iran, which will come into force after the six months wind-down period ends on 4th November 2018.

The immediate effects are less tangible but will surely add more uncertainty to the whole shipping industry that has plenty of uncertainty to deal with already, BIMCO’s Peter Sand said in his recent markets roundup.

Freight rates for both crude oil tankers and product tankers are mostly in loss making territory. Hardest hit are the larger crude oil tankers. For example, on 25th May, average earnings for VLCCs, Suezmaxes and Aframaxes stood at $4,238; $18,073 and $17,930 per day, respectively.

In the product tanker sector, average earnings were almost as bad, ranging from $10,561 per day for an LR2, $6,500 per day for an LR1 to $9,121 per day for an MR.

In the International Energy Agency (IEA) April Oil Market Report, the agency queried whether OPEC could claim ‘mission accomplished’ shortly, on rebalancing the global oil market after several years of supply being significantly higher than demand.

BIMCO believed that the oil market still has some way to go before being balanced. Global oil stocks appeared to be significantly above a ‘reasonable’ target (same stocks/consumption ratio as before the building up of stocks).
The tanker industry will enjoy a noteworthy higher level of demand when global oil stocks are drawn further down, Sand said. Moreover, a better oil market balance may also cause a return to an oil price contango, which is likely to indicate an increased demand for tankers for floating storage.

                          
Supply

March 2018 was the busiest month for crude oil tanker demolition, specifically for VLCCs, since 2003, with 10 units sold for demolition. Such high activity also led to a lack of growth during the first four and a half months of 2018.

Even though demolition of product tankers was high – as 1.1 mill dwt left the fleet - this sector still grew by 0.9% from January through April.

Whereas today demolition is affecting the freight market balance, ordering of new ships represents an omen of what is to come.

Currently, it seems that owners and investors who are starving in the freight market have little appetite for ordering new ships for future delivery.

Crude oil tanker ordering is up by just 6% to 6.6 mill dwt (including 20 VLCCs) during the first four months of 2018 from a year ago, whereas product tankers are down by 33% to just 1.4 mill dwt from 2017.

Owners and investors have also cooled their interest in secondhand tonnage, with an average of only six ships changing ownership a month this year. This is 50% down on the 2017-average monthly S&P business.

The current freight market conditions has also meant that less money was spent, even though asset prices have moved up since the low levels of 2017.

Sand said that BIMCO had revised its previous estimate for crude oil tanker demolition upwards, from 9 mill dwt to 13 mill dwt for this year. The immediate effect is that the estimated fleet growth for 2018 comes down to 2% from 2.7%. During the first four months of 2018, 8.5 mill dwt of crude oil tanker capacity was demolished.

This year is one of prime focus for the crude oil tanker sector with fleet growth below 2% particularly, if 2019 turns out as forecast with fleet growth above 3%, due to a lower demolition figure than seen this year. In an average crude oil tanker market, the fundamental conditions only improve if fleet growth is less than 2%, Sand warned.

Amongst product tanker companies, patience is paramount. The fleet is growing slowly but earnings aren’t improving. Quite a few new orders surfaced in November and December, 2017, but interest has cooled somewhat since then.

Staying away from the shipyards is essential for reaping the benefit that two years of tepid fleet growth (2018/2019 at 2.8% and 2.6%, respectively) could bring in the form of higher freight rates.


Outlook

Global oil stocks level, not only OECD oil stocks, remains the only factor to watch out for. It is also the one factor where hard data is available. Nevertheless, indirect measures point to stockpiles still being too high for normal tanker demand to resume.

This year thus far has seen such a narrow focus on VLCC ordering that the obvious question is - how much is too much? The developments in shipping in general and within the oil tanker sector in particular are focused on the larger ship sizes, but it remains important not to prepare too far in advance for what is forecast to come.

The better earnings that should come out of a stronger demand scenario, may end up disappointing, if there is large overcapacity, Sand said

Another problem - the sanctions against Iran have already had an impact on trade. But will we be able to single out the effect of US sanctions against Iran, when they kick in? The answer is - probably not to their full extent - as tankers are impacted by so many other factors – some more problematic.

For example, the ongoing crisis in Venezuela and Libya has limited oil production in those countries. Imagine if that situation was reversed? The world would then be awash with oil, something which is likely to keep the oil price in backwardation - a situation where the spot price of oil is higher than the expected future price of oil.

In addition, more pipelines are being built worldwide, and they are all equally critical to tankers – as they take seaborne demand away. Amongst the newer pipelines are the Sino­Myanmar pipeline to Kunming, the second Sino­Russian pipeline to Daqing and the East-West Petroline from Arabian Gulf to Yanbu in the Red Sea.

Another trend to keep an eye out for is to what extent will Europe keep its high products imports. In recent years, in particular we have seen Middle East refineries built for exports, with more to come online in the next couple of years.

But will those refineries end up producing for domestic purposes? Sand asked in conclusion.


Newbuildings

Remaining on much the same theme, Gibson Shipbrokers said that much attention had been given in recent months to continued activity in VLCC newbuildings.

However, what has gone largely unreported is the fact that ordering activity has been completely different in the other tanker segments, starting from Suezmaxes down to MRs.

Most notably, investment in new tonnage has been minimal in the LR1/Panamax size group. Just four tankers have been ordered thus far in 2018 (to the end of May), while ordering was also very limited over the previous two years. Without doubt, the lack of investment interest was driven by poor performance in this segment.

In recent years, LR1s have also faced an additional challenge in terms of the increased competition from both smaller and larger product carriers, frequently reporting lower earnings compared to other sizes.

Not surprisingly, owners have showed preference for smaller MRs or bigger LR2s when ordering a new tanker. With the exception of Handysize tankers, as at the end of May, LR1/Panamaxes have the smallest orderbook, at 7% relative to the existing fleet.

The Suezmax orderbook has also become notably smaller. Only two firm tanker orders,plus four shuttle tankers, have been placed thus far this year, while investment in this sector was also sparse in 2016 and 2017.
As a result, the Suezmax orderbook has now fallen below 9%, relative to the existing size of the fleet, nearly three time smaller than than the position two years ago.

The MR orderbook stands close to 10% thus far this year with just 26 confirmed orders,compared to over 70 last year. It is also worth pointing out that the Handysize orderbook is almost non-existent, numbering just three tankers yet to be delivered.

However, this is largely a reflection of owners’ preference for the larger MR size range when ordering new tonnage.

Finally, LR2/Aframaxes have the second largest orderbook of all size groups, largely as a result of robust investment in 2017. Yet, this has also slowed this year, with 12 confirmed orders year-to-date.

As such, the orderbook remains notably below that of VLCCs, as just under 12% of the LR2/ Aframax fleet is on order versus 16% in the VLCC segment.

The above developments indicate that the growth in fleet size for most size categories could slow down notably next year, particularly if the demolition market remains active. Scheduled deliveries for Suezmaxes, LR2/ Aframaxes and LR1/Panamaxes are expected to fall in 2019 to their lowest level since 2015. The number of scheduled deliveries in the MR segment in 2019 is on par with this year’s level, yet still notably below the number of new deliveries seen between 2014 and 2016.

This paints a much healthier picture in terms of fleet growth going forward.

However, in order to see a much-needed rebound in tanker earnings, the current trend of robust ordering in the VLCC segment should not be repeated in other tanker classes, Gibson warned.

In another move, in order to tackle environmental issues, the Chinese government announced even tighter regulations and taxation on the independent refiners and blenders (teapots) in an effort to weed out small operators and deal with tax evading players.

Outright closure of refineries with capacities under 2 mill tonnes per annum would be implemented should the independents fail to meet the new guidelines. In March, it was announced that the teapots were to start buying ethanol to blend with fuel to meet the government’s regulation that by 2020, gasoline must contain 10% ethanol.
China’s largest independent refiner Dongming Petrochemical has already obtained permits to start ethanol blending.

However, trouble could be brewing for China’s independents from several directions. The Beijing government has introduced new tax rules and shrinking diesel demand coupled with higher crude prices are beginning to threaten their survival and profits are being pressed for the first time since their meteoric rise.

 

 

  LMB-BML 2007 Webmaster & designer: Cmdt. André Jehaes - email andre.jehaes@lmb-bml.be
 Deze site werd geoptimaliseerd voor een resolutie van 1024 x 768 en IE -11-Edge
Ce site a été optimalisé pour une résolution d'écran de 1024 x 768 et IE -11- Edge