Famed New York Yankees manager Yogi Berra famously said, “It’s déjà vu all over again.” This sentiment aptly describes the current state of the tanker market, particularly for Suezmaxes. Historically, shipping has experienced deep cyclicality, often beginning and ending with extremely firm markets separated by prolonged troughs. Today’s tanker market conditions bear a striking resemblance to past cycles, making it challenging for stakeholders to commit to decisions, reports Baltic Exchange.
Market Dynamics and Historical Patterns
The tanker markets have been firm in recent years, influenced by a historically low order book in 2022, advancements in emissions and propulsion technology, and an aging fleet, some of which operates within the “Dark Fleet” carrying sanctioned Russian and Iranian oil. Over the last two years, secondhand tanker asset values have risen aggressively, outpacing freight rates. In some instances, five-year-old vessels are now more expensive than newbuilds—a rare phenomenon. This market environment could lead to overordering tankers, a pattern seen in previous strong markets. Given the longevity of ships, long-term oversupply may soon become a reality again.
Suezmax Sector Specifics
The conditions described are most pronounced in the Suezmax sector. The Baltic Exchange uses an average of the TD6 (Black Sea to Mediterranean) and TD20 (West Africa to Continent) routes for their weighted average Baltic Suezmax time charter equivalent (TCE). Although TCE levels remain healthy, they have decreased over the last two years. During this time, the Baltic Tanker Investor Indices for five-year-old Suezmax values have risen significantly, with a negative correlation (-0.40x) between freight rates and asset values. Remarkably, a five-year-old Suezmax tanker today is valued 7.1% above a newbuild order value, whereas historically, it is typically valued well below a newbuild.
With the 10-year Baltic weighted average TCE at $27,747/day, new builds appear more attractive if one is willing to wait. A Suezmax newbuild valued at $77.3 million would have an estimated first-year cash breakeven TCE of approximately $26,000/day, yielding positive cash flow against the average TCE over the last 10 years. Conversely, a five-year-old Suezmax valued at $82.8 million has an estimated first-year cash breakeven TCE of $30,200/day, resulting in negative cash flow against the 10-year average TCE rates.
Fleet Metrics and Market Considerations
Approximately 31% of the Suezmax fleet is 15 years old or older, while the order book represents 14% of the fleet capacity. Historically, the Suezmax fleet order book has averaged around 20%. Although the current order book only replaces about 46% of the aging fleet, it is far higher than the 28-year-low order book of 2.5% seen in the summer of 2022. Newbuild ships are expected to be more efficient and optimized for deadweight capacity, potentially offsetting some of the market risks.
The “Dark Fleet” also plays a role in supporting freight rates and asset values for modern ships by trading sanctioned oil, further complicating the market dynamics.
Investment Decisions
For the past two years, the Baltic Suezmax weighted average TCE was $50,900/day, significantly higher than the 10-year average of $27,800/day. This suggests that, despite potential future market corrections, strong cash flows over the next 30 months could significantly de-lever the acquisition of a five-year-old Suezmax today.
However, ordering a newbuild involves complex decisions regarding propulsion options. Dual-fuel options can be costly and unproven long-term, and future environmental and emissions regulations may change, impacting ships ordered today for delivery in 2026-27.
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Source: Baltic Exchange
