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Tanker Market Revival Dependent on Future Tonnage Supply

Ship owners have started to scale back on the tanker newbuilding investment over the course of the past few months, in what could be seen as a positive sign moving forward. In its latest weekly report, shipbroker Gibson said that “one of the forward looking indicators of how healthy (or unhealthy) the tanker supply/demand balance could be in a couple of years is the tanker orderbook. Limited new tanker ordering activity over the past three years has undoubtedly been a welcome development for owners. The only exception to this general trend was robust investment in new VLCCs back in 2017 and to an extent in 2018. This year also started strong for VLCC contracting, with 12 fresh orders placed in January; however, the interest in new tonnage has completely dried up since then. MRs (40,000 to 55,000 dwt) have also seen stronger investment this year, with 40 orders placed since January. This compares to just 59 MR orders for the whole of 2018. Ordering activity in other segments has been considerably more limited. This year no Panamax/LR1 orders have been placed, while the market has also witnessed just 6 firm Suezmax orders and 8 firm Aframax/LR2s orders”.

According to Gibson, “an overall lack of enthusiasm in new tonnage is not surprising. Despite a strong Q4 2018 and early 2019, cash flows largely remain constrained, following a disastrous performance during the 1st nine months of last year. At the same time, the priority for some owners, particularly those owning larger tonnage, has been securing finance for scrubber installations. Furthermore, regulatory uncertainly with regards to optimal vessel designs and specifications make the investment decision even more challenging at present. While ordering has been restricted, the pace of new deliveries has accelerated. Since the beginning of the year, 30 VLCCs, 22 Suezmaxes, 31 Aframaxes/LR2s, 6 Panamaxes/LR1s and 30 MRs have been delivered”.

The shipbroker added that “not surprisingly, a robust delivery profile coupled with limited new investment has translated into a notable decline in the orderbook. At present, the global tanker orderbook (above 25,000 dwt) stands at just 8.5% relative to the size of the fleet currently on water. VLCCs have the highest orderbook at 13.5%, while MRs have the 2nd largest orderbook – at 10% relative to its existing size. Despite having the highest orderbook, new investment in these segments is still relatively modest from a historical perspective. In early 2016 VLCC orderbook stood at 20% and back in 2011 it was assessed at a colossal 33% relative to its fleet size at the time. The orderbook size is even smaller for other segments. Aframaxes/LR2s and Suezmaxes have respectively 7.8% and 7.4% of its fleet on order, while the Panamax/LR1 orderbook is at just 5%”.

Gibson also noted that “most of the tankers on order are scheduled to start trading this year, maintaining downward pressure on industry returns. We could, of course, see some slippage in delivery dates. However, with growing optimism for improving market conditions in the 2nd half of the year evidenced in the freight forward curve, owners may be keen to avoid delays. Beyond 2019, the delivery profile is considerably lower, suggesting tightening supply conditions. The market is also expected to benefit from new regulations, which are likely to support demolition activity. While IMO2020 will make aging and inefficient tankers even less competitive, owners will also be evaluating whether it is worth investing into expensive ballast water treatment system retrofits when their deadline for installation approaches”.

“One of the key sensitivities is future ordering activity. Limited ordering so far this year has been a good indicator of current investment appetite. Newbuilding prices have also firmed notably, discouraging investment. The biggest uplift has been in newbuild Suezmax values, which have appreciated by 17% compared to lows seen back in 2017. However, the interest in new tonnage is likely to firm once we see sustainable improvements in industry returns. The question then is: will the anticipated increase in demolition be enough to keep tonnage supply in check?”, Gibson concluded
Nikos Roussanoglou, Hellenic Shipping News Worldwide

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