Tankers doing well, but owners holding back on new orders as written by Craig Jallal for Riviera.
The factors delaying a resurgence in ordering at this stage in the tanker shipping cycle
Demand for tanker services in the first half of 2023 was buoyed when global crude oil production experienced a significant adjustment in the second quarter of 2023. OPEC surprised the market by implementing a cut of 1.16M barrels per day (bpd) on top of the existing curbs of 2M bpd that had been in place since November 2022. These latest production cuts, aimed at stabilising the oil price market, will remain in effect until the end of 2023.
These cuts represent a reduction of 1.2% of global crude oil supply, or 3% of crude oil trade. Despite this, the first half of 2023 saw further growth in oil trade, with crude oil trade increasing by 4.6% year-on-year and the trade in oil products rising by 4.2%. China remains the largest importer of crude oil, accounting for 24% of global imports in 2022. However, there has been a decline for the second consecutive year, with imports falling by 2%, to 9.1M bpd. Since China eased Covid restrictions, seaborne crude imports have increased by 7% year-on-year, to 10.1M bpd from January to May 2023.
Chinese refinery runs have also seen a significant increase, reaching 14.7M bpd from January to May, a year-on-year growth of 9%. According to Clarksons Research Services (CRS), new refinery start-ups have contributed to this increase, with an additional 0.5M bpd already added and an expected total of 0.9M bpd for the full year of 2023.
China’s crude oil imports from Russia have surged by 46% year-on-year, reaching an estimated 1.6M bpd from January to May 2023. The majority of these imports come from the Black Sea and Baltic regions. Additionally, long-haul routes from ECSA and the Caribbean have seen a 30% year-on-year increase. Although the Middle East still accounts for more than 50% of China’s crude supplies, it is worth noting that volumes from the Middle East Gulf (MEG) have experienced a decline of 3% year-on-year from January to May 2023, reflecting Russia’s growing share.
CRS also reported a strong start to the year for the Chinese oil products trade. Seaborne exports increased by 48% year-on-year, to 1.0M bpd from January to May 2023. Conversely, products imports have surged by 82% year-on-year, to 0.9M bpd in the same period, driven in part by China’s independent refiners ramping up fuel oil imports.
“The current situation is considered a definite low”
Looking at the tanker supply side, there has been a significant decline in tanker contracting, particularly in 2022, with only 8M dwt of new orders, the lowest level in over 25 years and 68% below the 10-year average. This decline can be attributed to various factors, such as high newbuild prices, limited yard slot availability, due to large container ship and LNG carrier orderbooks, and uncertainty surrounding fuel technology.
However, there has been a pickup in product tanker ordering in 2023. According to CRS, 76 ships, with a combined capacity of 6.1M dwt, were ordered in the year to mid-May. This represents more than double the rate of orders compared to 2022 and surpasses the 10-year trend. LR2 product tankers have been particularly popular, with 34 ships, totalling 3.9M dwt, ordered, already 40% above the 10-year average. MR product tankers have also seen significant orders, with 35 ships totalling 1.7M dwt ordered.
Projected bulge of 7M dwt of product tonnage
As a result of this increased ordering activity, there is a projected bulge of 7M dwt of product tonnage scheduled for delivery in 2025. This could potentially drive a 3% growth in fleet capacity. On the other hand, crude tanker ordering has remained subdued, with only six Suezmax tankers ordered by May 2023. Yard slot availability is particularly tight for larger ships, with potential delivery slots for large crude units likely to be in 2026 or later. Some slots for product tankers in 2025 are available, but the majority of tanker capacity ordered in 2023 (approximately 95%) is scheduled for delivery in 2025 or later. In terms of historical tanker newbuilding trends, the current situation is considered a definite low.
On the earnings side, CRS’ weighted crude & products tanker index was a robust US$46,024 per day in the first half of 2023, which was 116% above trend and only marginally below the 20-year highs of 2H 2022. Normally in the shipping cycle, such an excess of cash would produce a flurry of newbuildings (followed upon delivery by a bust due to over-capacity), but as mentioned, too many negative factors have produced hesitancy for all but the bravest, most well-capitalised tanker owners, or those with long-term charters to well-capitalised charterers.
The lack of new tonnage entering the tanker fleet
The lack of new tonnage entering the tanker fleet has been driving activity in the sale and purchase market, where the classic indicator for the strength of demand for second-hand tonnage is the ratio of the price of a five-year-old ship to the newbuild price of a similar vessel.
In the tanker sector, the ratios are looking interesting. The Aframax ratio stands at 95%, with the second-hand price of US$62.5m, close to the newbuild level of US$65m. An interesting ratio, but not extreme – in 2005, the Aframax ratio reached 110%.
With tanker markets producing the strongest 12-month period for average earnings on record, assets on the water today are attractive, whilst a relative shortage of near-term newbuild berth availability has pushed more tanker asset demand towards the second-hand market. The equivalent ratio for a VLCC stands at 82% and 92% for an MR product tanker.
Looking ahead, tanker companies will continue to benefit from firm earnings, and without shipyards being able to offer tried and tested net-zero or zero-carbon emission designs, there will be restraint from owners fearful of investing in assets that become stranded less that halfway through the vessel’s lifetime. Until a zero-emissions design is in the water, the orderbook is likely to continue to feature LNG dual-fuel, methanol dual-fuel, or ammonia-ready, coupled with energy-saving devices such as carbon capture and storage and wind assistance for the lucky few tanker owners that can secure slots in newbuilding shipyards.
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