September 2024 | Outlook, Trends, and Emerging Opportunities

Monthly Tanker Market Outlook

As we step into the latter part of the year, the tanker market's trajectory is a subject of keen interest for many, including tanker brokers and financial institutions. Despite the cyclical nature of the industry, the prevailing market wisdom suggests a promising outlook for tanker owners. This favorable position opens up opportunities for fleet upgrades and expansions, especially while the financial outlook remains robust. The current market conditions support this stance, allowing owners to use their positive financial results to fuel investment in new assets, instilling a sense of optimism and hope for the future.

Brokers have noted an interesting trend: the useful life of tanker fleets is extending as more charterers are willing to assume the risks associated with older vessels. This shift is partly driven by limited availability and high costs for newer tonnage, leaving charterers with fewer options. While traditionally, older vessels have been viewed as riskier, a more objective evaluation reveals that age is not the sole determinant of risk. Factors like the vessel's management and the competency of the onboard crew play significant roles. Even modern ships are not immune to accidents, underscoring that risk is not exclusive to age. Geopolitical factors, particularly sanctions, have also boosted demand for older tankers as they are often used to bypass restrictions, prolonging their operational life.

Newbuild Outlook

The tanker newbuild order book shows signs of slowing, with few bullish orders beyond 2027. Although many tanker owners are currently flush with cash due to a robust market in recent years, their focus has shifted. Chinese shipyards, which have historically played a significant role in the tanker market, have prioritized container ships and offshore assets due to rising demand, leading to higher costs for tanker construction. Despite potential reductions in steel prices, Chinese yards are struggling to cut costs, driven by escalating labor expenses. Weak industrial demand in China has also dampened steel pricing, further complicating the outlook for newbuilds.

While China is expanding its shipbuilding capacity, these new yards are largely focusing on smaller, domestic vessels like container ships and bulk carriers, rather than tankers. This shift in focus could potentially lead to a decrease in tanker construction and an increase in costs due to supply chain inefficiencies. For example, Hengli, a major player in the shipbuilding industry, initially entered the tanker market but soon shifted its focus to bulk carriers. Given the inflated costs of second-hand tankers due to supply chain inefficiencies, it may still make financial sense for owners to consider newbuilds in the longer term.

Scrapping and Fleet Age

Scrapping has traditionally played a crucial role in maintaining the balance between supply and demand in the shipping industry. It helps remove older, less efficient vessels from the market, contributing to a healthier fleet overall. However, scrapping activity has significantly declined over the past few years. With the market remaining strong, owners are reaping the rewards of holding onto older vessels, some between 20 and 25 years old. In fact, 20% of the current global tanker fleet is over 20 years old. Many of these ships are being repurposed for new markets, such as floating storage units or operating within sanction fleets, further delaying their retirement.

Geopolitical and Market Forces

Looking ahead through the remainder of 2024, forecasters are cautiously optimistic, predicting that no new geopolitical crises will emerge to disrupt the shipping industry further. However, the Red Sea remains a region of concern. Recent attacks in the area have underscored the risks to shipowners, particularly as these incidents have increasingly resulted in loss of life. These heightened risks are likely to temper some owners' appetite for operating in high-risk regions, potentially impacting future fleet positioning.

On a more positive note, the seasonal uptick expected in Q4 should benefit the tanker market. Winter weather typically extends voyage durations, leading to higher freight premiums and increased demand for limited tonnage.

China's demand for seaborne cargoes, including crude oil and chemicals, is forecast to peak in 2025. Industrial growth remains sluggish, consumer confidence is weak, and housing construction is expected to slow further. Many investors are bracing for a prolonged recovery, and demand growth for tankers in China may decrease as a result. On the other hand, India is showing promising economic growth, which should increase its demand for tankers and help offset the impact of a slowdown in China. This could present opportunities for tanker owners to diversify their operations and tap into the growing Indian market.

Methanol Update: Alternative Fuel Uncertainty

The debate around alternative fuels for shipping remains far from settled, with little consensus among industry stakeholders. Shipowners largely adopt a "wait and see" approach to evaluate the various options, including LNG, methanol, ammonia, and hydrogen. According to DNV, only 50% of ships on order have opted for dual-fuel capability. The uncertainties surrounding performance, cost, regulatory controls, and fuel availability continue to deter owners from making definitive fuel choices.

One significant hurdle for methanol as a marine fuel is its supply outlook. Market intelligence indicates that methanol supply may be constrained through 2030, as 72% of planned methanol production plants remain stalled, with investment funding still awaiting approval. This has led to concerns that the available methanol production volumes in the market have been overstated. Shipowners are now facing a dilemma, as the expected supply may not meet demand.

In a notable development, Maersk, one of the most prominent proponents of methanol as a marine fuel, has reversed its latest newbuild designs, opting instead for LNG-powered ships. This shift is particularly significant given that Maersk has been championing methanol for its newbuild container ships since 2021. This decision underscores the ongoing uncertainty surrounding methanol's future as a viable marine fuel.

The coming years will be crucial for determining which alternative fuels emerge as front-runners, but for now, shipowners remain cautious, carefully weighing their options.