Tanker Shipping - improving asset prices for product tankers

Tanker Shipping - improving asset prices for product tankers

Overview

The market for crude oil tankers hasn’t been particularly upbeat in the first half of the year. Product tankers however have delivered very decent returns if judged by their performance during the last 7 months.

Demand:
The first half of 2013 has passed and fortunately we have started on a positive note as we enter into the second half of the year. Freight rates have been elevated in all crude sectors in recent weeks. Looking back, the VLCC spot fixture activity in the first 6 months has been significantly lower than it was during the first half of 2012, according to McQuilling Services. In particular, fixtures going from AG to USG (-19%) and AG to Far East (-16%) have made life difficult for owners. Apparently, too much tonnage leaves charterers spoiled for choice and owners anxious whenever the tonnage lists get too long. However, gravity has been defied recently, as earnings did not return to the devastating levels seen earlier in 2013 as forecast, but instead went close to USD 25,000 per day in the first part of July.

The market for crude oil tankers hasn’t been particularly upbeat in the first half of the year. While a few pick-ups in earnings did arrive, the overall impression is one of discomfort.
In the oil market as such, China stays the positive factor for now, unless it too begins to produce more crude domestically. Some signs of that have surfaced during the first half of the year. It remains a negative event for the crude oil tanker market if China, like the US, becomes more self-sufficient than is the case today.

In the oil products market, US gasoline imports continue to disappoint, because the increased gasoline demand has been supplied by domestic production, which no longer struggles to meet demand. Refinery capacity is sufficiently large to provide gasoline for drivers and distillate for exporters. While overall growth in the total US oil products trade has been flat recently, gasoline exports, and particularly distillate exports, have grown strongly. Exported volumes of distillate in May were the second-largest on record, putting exports numbers beyond the 1 million barrels per day mark again.

 
As regards asset values, MR product tankers have delivered very decent returns if judged by their performance during the last 7 months (source:VesselsValue.com). An MR built in early 2013 has gained no less than 15%, while more vintage tonnage has gained 6%. Also, newer LR1 tankers have delivered – but here the age cut-off point is between 2007/2008; older tonnage has lost value.

On the other hand, owners of crude oil tankers have felt the full force of poor freight markets and seen asset values drop across the board, with the exception of the 0.3% gain on 2013-built Aframax tankers. Tonnage for future delivery has all gone up, with Suezmaxes being the disappointed outsider in the red zone.

Supply:
All focus continues to be on product tankers, as the crude oil tanker segment is still experiencing some very tough times in the freight market. In short, product tanker supply growth is expected to see its lowest level of new deliveries in a decade, as BIMCO projects 4.3 million DWT to be delivered for the full year.

The product tanker orderbook now holds 38% more tonnage at 14.3 million DWT, comprising 229 ships, up from the January low at 10.4 million DWT. One hundred and thirty of these 229 ships are in the “hyped” MR segment, but LR2 product tankers are also in fashion, with 40 new ships ordered in the past 14 months.

In the meantime, the crude oil tanker segment is still bracing itself for the expected impact of 22.7 million DWT of new tonnage, offset by 10 million DWT of tonnage sold for demolition. This will see the fleet grow by 3.4%.

The hardship in the crude tanker segment is mirrored in the activity for newbuilding contracts. Whereas the much smaller (in DWT size) product tanker segment has seen new contracts for
7.3 million (101 ships), orders for just 5.7 million (36 ships) in crude tanker tonnage were signed. Going into the details, it is worthwhile to notice that of the few orders placed so far, half of it represents Chinese owners ordering 9 VLCCs at domestic yards for 2014-2015 delivery ordered back in January and February.

Demolition activity in the crude oil tanker segment has finally picked up, as June and July have delivered 2.2 million DWT for recycling. That amount is equal to the demolished tonnage during the first five months of 2013. As much as 5 VLCCs have been sold for demolition, of which three of them were double-hulled, two of them were 20 years of age and the last just 14 years old. Added to that were three Aframax tankers, one Suezmax and several smaller crude carriers.
 
Outlook
When will “normality” again prevail in the chartering market? The poor freight market has turned the charter rates upside down since the collapse back in 2009. In todays’ market, the longest-lasting time charters also reap the highest freight rate. This goes for all oil tanker segments. Whether rates have reached the bottom for crude oil tankers is unlikely, as illustrated by the falling Aframax t/c rates.

 
In the meantime, MR product tankers’ t/c rates have begun to improve, with 3 and 5 year time charter rates checking in at USD 15,250 per day and USD 15,750 per day – numbers not seen that high since mid-2009. It should be borne in mind that most long term contracts are done with a profit-split element included in order to get the business done while retaining upside – a win-win for both parties.

The tanker market is changing right now – and is doing so fairly quickly. The big change is coming from US trading but also from the slowdown in China and subsequent lowering of demand. US imports are at their lowest point in 17 years and during the driving season, the new and enhanced export of oil products has taken a breather.

What do we need to reverse the sour trend? First of all, longer hauls to key growth nations would be good. This can be done if China seeks to take more oil from South America instead of growing its dependency on the Persian Gulf exporters. Secondly, longer hauls on US product exports. The latter is already happening, as US grow exports to e.g. South America, Turkey and Japan. Increased volumes going to the Caribbean and West Africa are also beneficial for product tankers, unless it squeezes out longer European export trades. Latin America is set to be an interesting export destination, also for European refineries, as regional capacity is insufficient.

BIMCO expects that T/C equivalent average earnings for the VLCC segment will settle somewhat from recent highs in the interval of USD 7,500-17,500 per day. Suezmax crude oil carriers are seen up from recent lows at USD 10,000-20,000 per day. For the Aframax segment, expectations are that earnings will remain around USD 8,000-18,000 per day.

In the product segment, BIMCO expects earnings on benchmark routes for LR1 and LR2 from AG to Japan will pick up a bit after some weakness recently to hit the interval of USD 7,500-17,500 per day.

Handysize rates have seen significant volatility lately, but are expected to be more stable in coming months at USD 8,000-13,000 per day. MR clean rates hold up nicely nowadays and are expected to spend more time in the sun. For the coming two months, BIMCO expects freight rates around USD 9,000-14,000 per day.

in Copenhagen, DK

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