- Over the past few years, tanker owners have watched container ship values surge to unbelievable levels.
- Their own values have struggled against a backdrop of weaker fuel demand following the pandemic.
A recent news article published in the Riviera states that macroeconomic uncertainties cloud asset plays in tanker sector.
Recovering oil consumption
Gradually recovering oil consumption and the fallout from Russia’s aggression in Ukraine has propelled spot earnings and, with that, second-hand values to levels not seen in over a decade. Newbuild prices had already firmed due to tighter yard availability and cost inflation; however, second-hand prices, which are more closely linked to near-term spot market developments, only started to gain momentum at the end of last year, partly supported by increased optimism around oil demand and a declining orderbook. Long delivery lead times, uncertain regulations and high yard pricing have also made second-hand tonnage a more attractive proposition, given the shorter investment timeline and prompt delivery a second-hand vessel offers. So, what factors might support further rises in values, and is the bubble about to burst?
For context, second-hand (five-year-old) MR values faced a downward trend through much of 2020, before stabilising in 2021 and growing impressively from US$29M in December to US$34M at the time of writing. In fact, US$34M for a five-year-old MR tanker today exceeds the price of a newbuild MR back in January 2021, and overall represents a 17% increase in the last 18 months. Aframaxes have shown even more impressive price rises, with five-year-old values rising 50% since January 2021 to US$51M, exceeding newbuilding prices seen in early 2021.
Yet prices could still be driven higher. Clearly, asset values will remain supported while the spot markets continue to be exceptionally strong. However, other factors could be equally as impactful. The implementation of a Russian oil embargo and a corresponding Western insurance ban will prevent many owners who are currently willing to transport Russian oil from doing so. As we move closer to December, it is likely increased sale and purchase activity will occur for buyers based in Russia, the Middle East and Asia, which will continue to support prices and mark a continuation of a trend already seen since the invasion.
Easing of sanctions against Iran or Venezuela
Conversely, any easing of sanctions against Iran or Venezuela could have the opposite effect. If sanctions against these countries were to be removed, much of the current fleet servicing these trades could migrate into Russian business – another trend observed to some extent already.
There is also the question as to whether Europe has the resolve to press ahead with its Russian oil embargo and insurance ban at the end of the year, having recently softened current sanctions relating to Russian energy exports. Such an embargo could become even more difficult to enact if Iranian and Venezuelan barrels remain off the market.
Finally, there is the wider macroeconomic picture. Slowing global growth and recessionary fears all have the potential to lower demand for tankers and thus impact asset values, and, while most major forecasting agencies still predict growth, consumer and business confidence continues to decline.
Potential for a further upside in tanker asset values
Ultimately, there is still the potential for a further upside in tanker asset values; however, increasingly, the downside risk is coming into focus. Owners can take comfort from a low orderbook and be encouraged by the reallocation of trade prompted by Russia’s invasion of Ukraine, yet how they balance this against the broader macroeconomic picture will ultimately depend on their appetite for risk.
Poten & Partners’ weekly tanker opinion
Tanker asset prices have been on a tear lately. VLCC newbuilding prices have increased from US$88.4M in January 2021, to US$119M this month, an increase of 35%. Second-hand prices have shown a similar trend. Over the same time period, prices for five-year-old VLCCs are up 23% and 10-year old VLCCs are up 31%. The price developments in the other tanker segments, from Suezmaxes down to MRs mostly mirror those of the VLCCs. The last time asset prices increased like that was during the tanker “supercycle” from 2004-2008. As they say: “History doesn’t repeat itself, but it rhymes.” So, are there any similarities between now and then? Can we draw any conclusions from what happened then and apply them to today’s market?
Let’s highlight the differences first. The tanker supercycle of 2004-2008 was primarily driven by a combination of strong oil demand growth from China and (initially) tight tanker supply. After many years of mediocre returns and limited ordering, there was not a lot of spare shipyard capacity. The commodities boom of the supercycle supercharged all shipping segments simultaneously. Tankers, bulkers, containerships, LNG carriers and offshore were all booming at the same time. Strong demand and limited supply pushed up asset prices. Because of limited newbuilding capacity, delivery times started to stretch well beyond the normal 18 months to two years. VLCCs ordered in 2007 had a scheduled delivery date in 2011. Early deliveries were at a premium and prices for modern second-hand vessels approached and occasionally surpassed newbuilding prices. At the peak, in September 2008, a newbuilding VLCC cost US$162.5M for delivery towards the end of 2011. Poten assessed the price of a five-year-old second-hand VLCC at US$164.25M. Freight rates were so high that owners put a significant premium on prompt delivery.
The current situation is quite different in many respects, although there are some similarities. First the differences. We are not in a commodities supercycle driven by robust growth in demand. There is growth in demand for certain commodities (mainly as the world recovers from the pandemic) and prices have increased. However, supply restrictions and geopolitical events have more to do with it than sustained rapid demand growth. Economic expansion in China, the driver of the last cycle, has slowed dramatically. Compared to the first decade of this century, the current economic outlook is rather subdued.
Focus on climate change
Another significant difference is that the world is now very focused on addressing climate change and reducing global emissions, including from shipping. For tanker owners this means that the future of their business has become more uncertain (peak oil demand is coming) and that investment decisions now need to incorporate choices around fuel and propulsion. None of these factors played a significant role when the previous generation of tankers were ordered 15-20 years ago. Vessels were pretty standard in terms of specifications and fuel consumption. The more fuel efficient “eco” design vessels only came into play 10 years ago.
As we mentioned before, second-hand values actually surpassed newbuilding prices for a brief period in 2008. This is unlikely to happen during this cycle. As a result of higher steel prices and more expensive components, as well as environmental modifications such as scrubbers or dual fuel engines, newbuilding will likely remain more expensive than older second-hand units. So far, newbuilding prices have increased faster than second-hand values in the current cycle. However, this will likely change if rates continue to recover.
What are the commonalities between the two periods? First of all, similar to today, the market was in a recovery mode in 2003/2004. Initially, shipowners were cautious to see if the recovery would be sustainable, but when demand growth continued and freight rates remained high, owners started to expand and order new ships. Today, we are still in the early part of the cycle. The world is recovering from the pandemic, but there is a war raging in Europe and high commodity and food prices are fueling inflation and raising the specter of a global recession. However, if the global recovery continues, the war ends and rates remain strong, ordering will eventually resume. Shipowners are optimists and they will want to take advantage of a strong rate environment by expanding their fleet.
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Source: Riviera
