Low order volume could set scene for better tanker prospects

Malcolm Latarche
Malcolm Latarche
ShipInsight

05 August 2019


Low freight rates are having a dampening effect on new tanker orders, Potens has said in its latest opinion on the tanker market, and this could lead to a better market in the future.

According to Potens, provided that oil and tanker demand continue to grow (and demolition picks up as well) a reduction in ordering caused by lack of newbuilding finance in times of oversupply will typically sow the seeds for the next recovery in rates. For the tanker market, the last good year with healthy rates was 2015. Rates across all segments have been depressed since then. 2017 and 2018 were particularly bad. After a relatively strong winter market, rates in 2019 have dropped again and we are firmly in the summer doldrums now. Shipowners are looking at the next winter market with a sense of guarded optimism, especially since it will coincide with the implementation of the IMO 2020 Sulphur regulations on January 1. Is that warranted?

Analysing the market, Potens says tanker ordering has been relatively modest so far this year. According to its data, only 61 tankers of all sizes were ordered in the first six months of 2019 (41 in Q1 and 20 in Q2). This is the second lowest tally for the first half of the year since 2011. Only 1H 2016 was lower (24 total), but that came right after a record year of 2015, when no less than 503 tankers were contracted. Ordering in 2015 was the highest since 637 tankers were contracted in 2006, in the middle of the tanker “Supercycle”. The 2015 ordering bonanza created the tanker oversupply that the market is currently suffering from. The more modest ordering in recent years could set the scene for a more balanced tanker market in the coming years.

Hardest hit is the VLCC sector with only 14 new orders this year compared to 35 in the same period of 2018 and 31 in 2017. VLCCs have also benefited the most from the acceleration of demolition in 2018. After many years of little or no scrapping, 33 VLCCs were removed from the fleet last year (about the same number as the prior five years combined). Demolition activity has slowed again this year. Only four VLCCs were sent to the breakers in 2019 to date. Despite the slowdown in ordering, VLCCs still have the highest orderbook, representing 11.2% of the current fleet (90 vessels). A number of these were ordered in 2014/2015 and some of them may never deliver.

For Suezmaxes, the numbers are more modest. Since 2015, when a record 89 Suezmaxes were ordered (leading to record deliveries and fleet growth in 2017), newbuilding contracts in this segment have dropped dramatically. In the first half of 2019, nine Suezmax tankers have been contracted. The current orderbook is a relatively modest 45 vessels (7.7% of the fleet). The Suezmax scrapping rate is running slightly ahead of the VLCCs this year (five versus four).

Aframax and LR2 orders have completely dried up and appear to have fallen out of favour. However, MR product tankers seem to be the product carriers of choice. While ordering has subsided from the highs of 2013 (204) and 2015 (111), there is a steady order flow of around 60-65 units in recent years. While 2019 seems to be a high delivery year, new additions are more subdued in 2020 and beyond. The orderbook for MRs stands at 9.4%. There appears to be limited demand for the smaller Handy size tankers. Only 24 vessels (3.3% of the fleet) are on order.

Potens sees the slowdown as positive saying the overall outlook for supply growth is relatively bullish. Ordering has subsided and some vessels in the orderbook may never deliver. Under this scenario, a normal winter market combined with some IMO 2020 induced dislocations and demand growth can lead to significant rate improvements.