Tanker Market Looks Strong into 2024
Capital Link
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Shipping Company CEOs Discuss Sector Trends & Outlook
Highlights from Capital Link’s Webinar Series
Featuring some of the most prominent voices in both the Product and Crude Tanker sectors, the latest webinar from Capital Link on November 28, 2023, delved into issues surrounding the tanker market’s current status, its outlook for the new year ahead, and the many supply and demand factors that impact the tanker sector.?
Highlights:
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Webinar Participants:
Mr. ?ystein Vaagen from Fearnley Securities moderated the webinar discussion, in which Mr. Paolo d’Amico , Chairman of INTERTANKO, Executive Chairman & CEO of d'Amico International Shipping S.A. (BIT: DIS; OTCQX: DMCOF), Mr. Lars H. Barstad , CEO of Frontline (NYSE: FRO), Ms. Lois Zabrocky , CEO of International Seaways (NYSE: INSW), Mr. Ted Petrone , Vice Chairman of Navios Maritime Partners (NYSE: NMM), and Dr. Nikos Tsakos , Founder & CEO of TEN Ltd. (NYSE: TNP), Chairman - INTERTANKO (2014-2018), provided their valuable insight into the tanker market as well as their company strategy.?
The full webinar can be accessed at:
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Since late 2022, the crude and product tanker markets have maintained robust performances, with rates consistently reaching substantial highs. This trend has shown no signs of slowing down, evident in the remarkable 260% increase in the collective market capitalization of companies participating in a recent industry webinar.
During this webinar, industry leaders discussed key factors influencing the strength of both crude and product tanker sectors. They delved into the impact of geopolitical and economic variables on tanker demand and shared insights into the sector's tight supply dynamics.
Tanker Market Looks Strong into 2024, Diversified Fleets Reap Benefits
Providing her insight regarding the current state of the market, as well as her outlook into the tanker segment’s performance as we head into the winter season, Ms. Lois Zabrocky of INSW emphasized that tight inventories and market conditions have led to significant rate fluctuations even with minor demand shifts. Having a diversified fleet, encompassing various vessel sizes, has proven advantageous. Smaller ships, notably MR tankers, have consistently earned strong rates, averaging around $30,000 per day for the past two years due to high diesel demand. Surprisingly, mid-sized vessels like Panamaxes, Aframaxes, and Suezmaxes are now earning as much as the larger VLCCs, further highlighting the benefits of maintaining a balanced fleet. Her outlook for the market remains extremely positive due to this fleet diversity.
Echoing Ms. Zabrocky’s sentiments, Mr. Paolo d'Amico of d'Amico International Shipping stated that he anticipated a robust winter market for the sector. Factors contributing to this expectation include the conclusion of refinery maintenance in October and the onset of colder European weather. Despite acknowledging an economic slowdown, he remained optimistic due to high daily rates, favorable fleet positioning, and rising ton-mile demand. These trends are particularly boosted by the significant movement of products from India to Europe, leading to a surge in ton-miles and the likely need for a substantial number of LR2s.
Mr. Ted Petrone of Navios Maritime Partners highlighted the company's recent fleet transactions, including the sale of seven tankers and the acquisition of ten new LR, MR, and LR2 tankers, signaling the company's shift toward product tankers. While their initial focus was on crude tankers, long-term macro trends, especially the increase in ton-mile demand, influenced their move toward product tankers.
Mr. Petrone noted that they, like many others in the industry, have been able to secure rates well above the 20-year averages for extended periods, reflecting industry-wide optimism about future market conditions.
Impact of OPEC Decisions on Larger Tankers
Currently, the tanker market is closely monitoring OPEC's decisions regarding oil cuts. Last summer, OPEC agreed to extend oil output cuts of 3.66 million barrels per day until the end of 2024. Discussions are ongoing about the possibility of implementing further cuts to stabilize the market. Mr. Lars Barstad, CEO of Frontline, believes that OPEC will likely continue with its current production cuts, as they have been fairly coordinated in their efforts to maintain oil prices. These cuts have had a dual impact on the tanker market. While they could potentially reduce fuel costs and increase overall volume due to more oil in the market, they have also allowed for longer transport routes, particularly from the USA and Brazil. These extended routes have increased ton-miles, benefiting larger tankers.
Interestingly, the voluntary cuts made by Saudi Arabia and Russia, initially expected to negatively impact the tanker market, have proved to be advantageous for larger tankers. As a result, VLCCs are bringing in high rates, while Suezmax and LR2 tankers are currently earning around $30,000 a day.
Despite the positive rates, Mr. Barstad expressed concerns about the market's pricing power. Historically, the Middle East played a significant role in setting freight rates. However, a decline in spot cargoes from the Middle East, with many cargoes now being lifted by COAs (Contracts of Affreightment) or other actors not motivated to increase rates, has diminished the region's influence. As a result, the industry now relies more on regions like the USA Gulf, Brazil, and West Africa for pricing. This shift has led to some disappointment as the market has not firmed up as expected.
Supply-side Dynamics: Aging Fleet, Full Shipyards, and Environmental Uncertainty
Compared to demand dynamics, supply-side fundamentals are more predictable. The global fleet is aging, with few newbuild deliveries expected in the coming years. Shipyards worldwide are struggling with capacity constraints and labor shortages. Moreover, the uncertainty surrounding future fuels has deterred shipowners from investing in newbuilds, fearing they could become obsolete if not compatible with future green fuels.
Environmental regulations and fuel uncertainty have also discouraged overbuilding, especially in the VLCC segment. The scarcity of new VLCCs may create opportunities in the LR2 and Suezmax segments, where demand could outstrip supply in the near future.
The financial burden of acquiring new vessels, along with environmental concerns, has further discouraged shipowners from investing in new ships. Surprisingly, IMO regulations, viewed by some as potentially negative for the sector, have proven beneficial by preventing potential overbuilding. Dr. Nikolas Tsakos, CEO of TEN Ltd., highlighted that, despite the uncertainty surrounding green fuels and environmental regulations, dual fuel ships serve as a transitional solution. To ensure that the investment is worthwhile, Dr. Tsakos stated that his strategy for purchasing new vessels involves ordering ships either to replace aged-out vessels, or those that come with long-term charters.
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Ms. Zabrocky, INSW’s CEO, stressed the complexities that are included in the decision to purchase new ships. One must weigh out the costs and benefits of investing in dual fuel ships, while searching for the most flexible investment available, both in terms of financial and fuel flexibility. This decision-making process also includes assessing the total projected fuel consumption curve, which is critical in determining the efficiency and environmental impact of the vessels over their lifespan.
While shipowners may be willing to invest in ships fitted with the latest, pricy green technology, their clients may not be willing to pay more for the use of the vessels, Frontline CEO Mr. Barstad argued. This issue is particularly common in the tanker sector, he stated, contrasting it with other segments like container shipping and car carrying, where clients are more willing to pay for greener technologies. In the case of tankers, there is very little motivation for clients to pay for the addition of new technology.?
Mr. Barstad points out that in industries such as container shipping, clients like Nike are willing to pay a premium for transportation that has a "green shimmer," reflecting the company’s dedication to environmental sustainability. This makes it a financial incentive for container shipping companies to invest in greener technologies. Similarly, in the car-carrying industry, there is a demand for more efficient propulsion due to the need to align with the environmental standards associated with the cars being transported.
However, the situation is markedly different in the tanker industry, which primarily transports hydrocarbons. Clients in this sector are not yet willing to pay the additional costs associated with environmentally friendly propulsion technology. This lack of financial incentive makes it challenging for tanker operators to justify the significant investments required for adopting such technologies.
Challenges Posed by an Aging Fleet
The economic lifespan of tankers is traditionally considered around 25 years, although some argue it's closer to 20 years. The age profile of the global tanker fleet shows a significant portion approaching or exceeding the typical scrapping age.
Mr. Vaagen of Fearnley Securities highlighted the age profile of the global tanker fleet—arguing that a significant portion of the global tanker fleet is approaching or will soon exceed the typical scrapping age of around 25 years. By 2027, about 7% of the fleet will be over 25 years old, essentially balancing out the current order book, which accounts for about 5% of the fleet. Looking further ahead to 2030, almost 20% of the fleet will be over this age threshold.
?This aging fleet, combined with expected growth in oil demand and ton-mile trends, creates a positive outlook for the tanker market. However, shipowners may have to operate older vessels to meet demand, posing challenges given environmental regulations.
Clean tankers, which transport refined products, have shorter lifespans, typically around 15 years. Extending their lifespan may not be economically viable, given the difficulty of securing charters for older ships.
Alternatively, Dr. Tsakos of TEN stressed that many vessels built from 2005 to 2010 are of very high quality and may prove to live well past their estimated 20-to-25-year lifespan. He shared his personal experience of regularly visiting these ships and expressed his pleasant surprise at their condition even after 15 years in service. According to Dr. Tsakos, many of these vessels appear as if they could have been recently out of the yard despite their age.
Spot Market vs. Long-Term Charters – Striking the Right Balance
Currently, as both supply and demand fundamentals in the tanker sector are quite strong, the sector is welcoming significant profits. While spot rates come with the potential for larger profits, the stability that comes with securing long-term charters now, when rates are high, could prove advantageous if the market experiences a downturn.
Balancing spot rates and long-term charters is crucial in the current strong market. Mr. d’Amico stated that about one-third of DIS’s fleet is covered by time charter, while the remaining two-thirds are in the spot market. Currently, DIS has chosen to selectively time charter ships deemed more sensitive to market fluctuations while keeping most of their MR and LR 1 tankers on the spot market, to capitalize on bullish market conditions. Looking forward, Mr. d’Amico plans to increase time charter coverage by 2024.
TEN has pursued a similar strategy in terms of rates by maintaining a balance between spot and time charters, and the company has recently renewed or secured new charters for 26 out of 70 vessels at rates significantly higher than previous contracts. Dr. Tsakos explained that while TEN’s actual day-to-day operations might lean more towards 60% spot and 40% fixed, the company is open to taking on long-term charters when attractive offers arise.
In contrast, Frontline has primarily opted for spot rates but remains open to long-term charters under the right conditions. Charterers would need to offer higher rates to secure the company's larger vessels for long-term commitments, as current rates do not meet Frontline's threshold.
In summary, the tanker market remains robust, driven by high demand, tight supply fundamentals, geopolitical factors, and OPEC cuts. The sector is experiencing profitability, with diverse fleet strategies and cautious optimism for the future.
Forward-Looking Statements
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