Product tankers to offer better prospects than their crude hauling counterparts says Gibson Shipbrokers
In an interview with Hellenic Shipping News Worldwide, Mr. Steve Christy, Director with Gibson Shipbrokers Consultancy & Research, noted that a series of changes in oil trade patterns, coupled with market fundamentals of supply and demand, are expected to provide added boost in the clean product tanker market trade, rather than the crude tanker markets. He also mentioned that demolition activity is set to keep on rising during the 2013-2015 period, but not at a level strong enough to provide room for a full market recovery.
How is oil demand shaping up at the start of 2013? What are the projections for the rest of the year and how good do these bode for tanker owners?
Growth in world oil demand for this year is looking reasonably good and broadly in line with 2012. Current indications are for an increase of close to 1 million b/d over 2012 levels, and with some potential build in strategic oil stock in China, the overall position on the face of it looks as good as we can expect for tanker owners.
There are also certain trends in oil demand that will help some tanker sectors, but also threaten others. There is a clear division between what is happening in OECD countries compared with developing nations. The driving force behind oil demand gains is in the Asia-Pacific region, and in particular China. At the other end of the spectrum, the economic woes of Europe will mean another year where oil demand falls. In the US the decline in oil demand does seem to have come to an end, and stability here will be important for the tanker industry. However, the rapid expansion in US oil production through shale/tight oil is potentially one of the biggest ‘game-changers’ for the tanker industry over the next 5 years.
Thus, in general, oil demand prospects are pretty good for our business.
Tanker supply glut has been on the forefront of the demise of the freight rates market in recent times. Do you think that the latest data suggest that this oversupply is on the verge of easing off? If so, why has this occurred?
It is clear that the massive increase in crude tanker supply over the past 3-4 years has been the root cause of the current market weakness. For instance, during last year we saw record high numbers of VLCC cargoes loading out of the AG, and even though this volume of business was greater than in 2008, the returns were just a fraction. The expansion in the crude tanker fleet is coming to an end, and we expect only minor gains in the VLCC and Aframax fleets as the number of new deliveries slows considerably. Unfortunately, there are still a significant number of new Suezmax tankers to enter service in what is an already modern fleet (few scrapping prospects here). Nonetheless, the overall expansion in crude tanker supply is going to slow dramatically in the next 2-3 years.
However, this doesn’t necessarily mean that ‘oversupply’ is on the verge of easing! The other side of the coin is crude tanker demand, and we have already mentioned the increases in US oil production, which will result in reduced crude imports. Another significant development is the start-up of the new 400,000 b/d Saudi/Total refinery at Jubail this year. This is the first of 3 new Saudi refineries of this size that will be commissioned over the next 3-4 years, and will result in Saudi Arabia exporting less crude (but more products).
These dynamics are expected to lead to fewer AG VLCC cargoes and less international crude going to the US, which are negative influences on the crude sector. The positive angle though is more Atlantic Basin crudes going long haul to the East. The net impact of all of this is one of only modest increases in crude tanker demand in the next 1-2 years and nowhere near enough to quickly ‘mop up’ the current surplus.
If this is negative for the crude tanker sector, then these same developments can be considered positive for product tanker owners. More trade, more long haul business and no major increase in tanker supply over recent years all provide the fundamental basis for a far more promising market for these owners.
Will demolition activity prove to be the catalyst for the market’s recovery? Is there room for more ship scrappings, after the past couple of years’ increased activity?
Scrapping is likely to increase, not least removing the remaining single hulls. Also, we have seen more, first generation double hull tankers going for scrap, which can only help the industry. The current pressures on the market and proposed changes in legislation could consign more tonnage to the scrap yards.
However, whilst there is even a slight price premium for secondhand sales over scrap (there are currently willing investors out there to support this) then, unfortunately we are unlikely to see a mass exodus of tonnage being recycled. In our own forecast we expect scrapping during 2013-15 to be slightly higher than in 2012, but not enough to be a catalyst for recovery.
What about the clean product tanker market? Is it in better shape to bring in more earnings?
From everything I have said above, the crude tanker market could struggle for another few years, but the real promise is in products tankers. The recent surge in interest in new MR orders is evidence of the market upturn that we have already seen and the promising expectations outlined above. The danger though is for another period of over-ordering and it is important not only to review what the prospects are, but also what has already been done in terms of ordering.
For these reasons, the lack of recent orders for LR1 and LR2s, along with future gains in long haul products trade, makes these vessels the most promising in terms of earnings and new investment.
Although many argue it’s a sign of the times, Eco Ships appear to be here to stay. Do you believe that as times goes by, more and more tanker owners will turn to these vessels, despite the premium price required?
In terms of new investment, you have to go down the eco route. Forecasters generally are putting oil prices above $100/bbl, which means at least $600/tonne bunker prices. At this level you need to save as much fuel as possible, and the new eco ships certainly offer this. Perhaps more important is that in a weak market the new generation of eco tankers will be able to go at slower speeds and consume considerably less bunkers than their elder counterparts, making the economics at least more attractive.
However, in today’s crude tanker market it is difficult to justify the investment in a new order whether it is ‘conventional’ or ‘eco’. It is only when the market picks up (and it will) that we are likely to see a resurgence in crude tanker orders and at this stage the economics and environmental pressures will mean that eco ships will be a preference, if not the standard design.
Nikos Roussanoglou, Hellenic Shipping News Worldwide