Analysis by Poten & Partners
The tanker market has been doing very well so far this year, both for crude carriers and product tankers. Not surprisingly, contracting has picked up from previous years for most tanker segments. Owners are eager to take advantage of the strength in the market and the secondhand market is relatively tight, with more prospective buyers than sellers. This has created wide bid-ask spreads, especially for modern vessels. At this stage in the recovery, one may have expected shipyard prices to have increased materially as well, however this has not happened (yet) for various reasons. Poten takes a look at newbuilding activity in the tanker space and puts it in the context of overall ordering across all shipping markets.
Fig 1: Tanker Contracting by Segment (2011 2015 YTD)
(Source: Poten & Partners )
Tanker orders since 2011 have shown an interesting pattern, influenced by both sentiment and momentum in addition to market circumstances (Figure 1). Orders for large crude carriers were very modest in 2011 and 2012 as owners suffered in the midst of a tanker recession. In 2013, VLCC orders started to pick up, but Suezmax contracting remained in the doldrums (owners were concerned about the outlook for this segment in the wake of the WAF USAC trade disappearing amid the U.S. tight oil boom). The biggest boom in tanker ordering in recent years took place in the product tanker segment, mostly MRs but also LR2s. More than 300 MR contracts were recorded from 2011 to 2013, almost 180 of them in 2013 alone.
In 2014 and 2015, the ordering emphasis changed. MR ordering was scaled back significantly amid increasing concerns that the orderbook was growing too large too quickly. On the other hand, ordering for crude tankers picked up pace as the rate environment for these vessels improved dramatically. Based on year-to-date 2015 contracting, VLCC and Suezmax orders are on pace for their best year since 2006 when orders were placed for 100 VLCCs and 74 Suezmaxes.
Fig. 2: Contracting Activity by Major Shipping Markets (2011 2015 YTD)
(Source:Poten & Partners)
The last time tanker ordering reached these levels, ship owners were faced with rapidly rising prices, with VLCC contract prices ultimately exceeding $150 million in 2008. This is not happening at the moment. After they collapsed in 2009, VLCC prices have remained around $100 million over the last five years. Part of the explanation lies in reduced steel prices and lower labor costs as a result of the global economic slowdown, but we suspect that the reduction in newbuilding activity in other shipping marketshas played a significant role as well. Figure 2 shows how tanker ordering compares with other shipping markets over the 2011 2015 period. It is clear that any increase in tanker ordering is dwarfed by the collapse in bulk carrier and offshore vessel construction. As orders in these segments have virtually dried up (only 55 dry cargo vessels have been ordered so far in 2015, as compared to 756 in 2014 and an astounding 1,258 in 2013). As shipyards work their way through their existing orderbook, they are increasingly concerned about the declining forward cover. Yards face a reduced backlog and increasing competition and are in no position to increase prices. Recent financial results of the key Korean yards have shown the disastrous impact of the shipbuilding crisis on their bottom line.
Tanker owners currently face the best of both worlds: a strong negotiating position versus the shipyards in the best freight market of the last 5 years. What they do next will determine their fortunes for years to come. While a certain level of new orders to accommodate trade growth and fleet replacement is warranted, owners should resist the temptation to splurge.
Source: Poten
