Tanker Prices Hit Record Highs, But Sustainability In Question

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Currently, tanker asset prices are red-hot, with second-hand values and newbuilding prices at their highest levels in the last 15 years amid strong market fundamentals. While high freight rates and tight tonnage availability have underpinned second-hand values, the tight availability of shipyard facilities has inflated newbuild prices.

 Outlook remains bright

Although the outlook for crude tankers remains bright as stunted supply and strong demand will favour shipowners at least until 2026, the current high asset prices raise questions about the attractiveness of investment in tankers. The downside risk will keep increasing if asset prices inflate further, unless the forward curve of freight rates shifts further upwards on some unprecedented changes in the market fundamentals.

Current market dynamics

The rally in newbuilding prices started in 2021, with a flurry of orders in the container sector, tightening the slot availability at top yards. Even though tonnage ordering in the container sector has eased now, the bargaining power of yards remains high because of a boom in new orders in other sectors, including tankers, keeping prices elevated.

Newbuild prices

Similarly, newbuild prices have spiked almost 38% since early 2019. The low availability of prompt modern tonnage and high second-hand values are compelling owners to place new orders. Market players such as Trafigura and DHT have been investing heavily in new VLCCs, even partnering with less-prominent Chinese yards.

In a bull case, the equity IRR of 10.5% is higher than the cost of equity of 9.7%, suggesting rising freight rate environment favours shipowners. Project IRR is lower than WACC even under the bull case. In the bear case, both equity IRR and project IRR are lower than the required rate of retureturn.

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Source : Drewry