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Koninklijke Vereniging - Société Royale

DOSSIER

 

Where next?


Some aspects were good, while others were best not spoken about, said Gibson Shipbrokers in its 2016 report.

From a tanker perspective perhaps the most significant event occurred in the final quarter of the year, as on Wednesday 30th November in Vienna, OPEC agreed to “significant” production cuts.

This news was shortly followed by another announcement that several non-OPEC members would also cut production, taking the total level of expected production cuts to nearly 1.8 mill barrels per day.

Oil markets began 2016 in turbulent waters, with fears over just how low oil prices would go. Brent levels reached the bottom in January at below $30 per barrel, which coincided with average VLCC earnings of over $70,000 per day.

Oil demand growth remained robust, but slowed to 1.4 mill barrels per day from 1.8 mill barrels per day in the previous year, according to the IEA. With demand insufficient to absorb the surplus, OPEC finally conceded that production cuts would be needed to rebalance the market, pushing crude prices back above $55 per barrel.

As mentioned, the crude tanker market started the year strongly, carrying on from 2015 levels. However, rates and earnings gradually softened throughout the year before picking up again in the fourth quarter.

Crude tanker demand was impacted by supply disruptions in Nigeria witnessed earlier in the year. In addition, as slower growth in global oil demand was seen, oil markets became more balanced, leading to a decline in tanker operational and forced storage.

Furthermore, a heavy refinery maintenance season, which was reduced and/or postponed from 2015, due to high refining margins, had a negative effect on crude demand and tanker rates.

Fleet growth was high on the back of an increasing number of deliveries, whilst demolition was almost non-existent. As a result, the market is now digesting the deliveries from the ordering spree over the previous few years, although in 2016 new orders across the board were very limited, Gibson said.

This has added further downward pressure on the shipbuilding industry, which is going through a major crisis. Tanker newbuilding prices have fallen to or close to their lowest levels since 2004 and it remains to be seen if asset values will fall further this year.

Last year also saw the ratification of new industry standards, which will impact on several aspects of the shipping market in the coming years.

For example, the Ballast Water Management Convention will enter into force in September, 2017. Although not impacting on markets directly this year, the full effects will be evident in future years. In a similar vein, an agreement was reached to lower global sulfur limits from 3.5% to 0.5% by 2020. Both are likely to have significant ramifications.


Build-up

The build-up of significant product inventories around the world have limited trading and arbitrage opportunities for clean tankers.

In addition, there has been a noticeable slowdown in new export orientated refining capacity additions in the Middle East.

Spot fixture volumes are showing signs of being on a par with 2015 levels, while the growth in product tanker supply has accelerated notably. There also has been a drop in trading volumes for larger product carriers loading West of Suez, largely due to a lack of naphtha arbitrage to the East and limited trade to West Africa.

All of these factors combined have translated into a dramatic decline in clean tanker earnings last year. However, MRs in Asia have been generally able to outperform those in the Middle East and West of Suez, due in part to increasing product imports and exports levels from China.

Last year produced opportunities and challenges evolving around various aspects of the shipping industry. The year 2016 may well finish on a high across most markets. However, 2017 is likely to present a renewed set of challenges, which may trump 2016 from both a supply and demand perspective, Gibson said.

As for recycling, without the sale of two VLCCs in the final quarter of last year, tanker deadweight recycling totals would have been only slightly above the 2015 final figure.

In deadweight terms, tonnage sold for demolition in 2016 amounted to 2.46 mill tonnes, just 33 units of 25,000 dwt plus, as once again healthy earnings across most tanker sectors did little to encourage scrapping.

An extremely young age profile of the tanker fleet also affected scrap sales and newbuildings entering the market were initially absorbed with minimal impact until the latter half of last year. In contrast, demolition sales of drybulk carriers and the containerships contributed around 350 and 200 units respectively, as poor trading conditions continued to dog these markets.

The collapse in scrap prices, which started in 2014, continued and by January last year, lightweight prices on offer had fallen to below $300 per tonne for tanker tonnage. Over the final few months of 2016, lightweight prices started to recover, but failed to attract an influx of new tanker candidates despite softer tanker earnings. However, India/Pakistan levels were still considerably below the circa $500 per tonne range seen in September, 2014.

Of the 33 tankers sold last year, Pakistan breakers took exactly one third, followed by India with eight. The oldest vessel sold for scrap was the Suezmax ‘Leo’ (built US, 1978), which had been shuttling crude around the US Eastern seaboard for a couple of years. The youngest, the VLCC ‘Xin Ping Yang’ (built 2001) just made it into 2016 figures, reportedly bound for Chinese breakers.


Trading VLCC scrapped

In October, the ‘Progress’ (built 1994) had the distinction of being the first trading VLCC to be sold for scrap for exactly two years. One interesting point is that 10 of last year’s sales concerned single-hull tonnage, many of which had been lying idle for some time. In addition to the two VLCC sales, one Suezmax and seven Aframaxes were sold.

For 2017, Gibson anticipated tanker markets to be more challenging across most sectors. The production cutbacks announced by OPEC in November are due to be implemented from this month onwards.

In addition, the influence of the 240 newbuildings, which entered the fleet last year, plus those still to be delivered over the coming months, will also impact heavily on the tanker market. The recent legislation on ballast water treatment for implementation from September this year and the new lower sulfur limits from 2020 will all influence owners decisions whether to scrap although many owners may hold off to see if there will be exemptions or waivers applied.
However, the expense of putting a vessel through a third special survey, coupled with the high additional costs associated with the new environmental regulations will provide owners with considerable food for thought over the coming months.
Slippage
A few months ago, Gibson said that tanker slippage was likely to be substantial in 2016 – at over 15%.

As the year came to an end, the final results showed that the slippage was even bigger than initially thought. The actual delays in 2016 were around 25% of what was scheduled for delivery within the year.

In percentage terms, delays were the highest in the Suezmax segment - at 33%, with 13 out the 40 units, which were scheduled for delivery in 2016 have yet to hit the water. Panamax/LR1s were next, with slippage at 30%; while delays in the Handy/MR fleet accounted for 27% of the tonnage.

Finally, delays in the VLCC segment were at 25% and in the Aframax/LR2 size group at 18%.

 

 

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