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Ordering of new tankers about to pause

Tue 10 Oct 2017 by Barry Luthwaite

Ordering of new tankers about to pause
Buoyant tanker demand has sustained many yards. Ordering however is set to taper

The combined number of newbuildings and in-service vessels are more than enough to handle current and future demand

The tanker contracting boom continued over the past two months but there are signs, with a revival in bulk carrier business, that activity in the wet sector will become less frenetic.

Certainly, owners with enough tonnage to meet demand will welcome a pause because it would help freight rates. These rates have eased in recent months, but still provide viable earnings and profits. More owners are seeking pooling arrangements with major owners for economy of scale and stability in a still volatile trading climate.

Any doubts that the tanker revival has stalled are more than dispelled with a look at contracting so far in 2017. It stands at an impressive 254 units of all types, up from 188 vessels in mid-July this year. The deadweight has risen from 20,915,715 dwt to 28,825,158 dwt, but is countered by a fall in the overall order backlog from 1,082 vessels aggregating 98,286,463 dwt to 1,058 tankers totalling 95,274,649 dwt. Part of the backlog fall is due to the increasing rate of deliveries, which so far in 2017 number 319 vessels that have added 32,040,646 dwt to the global fleet.

Confidence abounds and the outlook is good. Older vessels will succumb to recycling if prices hold up at levels now in excess of US$400 per ldt. The long-predicted age expiry of 15 years is likely to materialise sooner rather than later given the appeal to charterers of a younger fleet meeting strict environmental legislation, which will induce higher freight rates. Substandard vessels need to be eliminated.

There is little doubt that shipbuilders owe a huge debt to the tanker sector for their salvation following the dry-bulk drought of over a year. The low prices still on offer have played a huge part in the ordering boom. Recent bankruptcies and the severe thinning of capacity to reduce huge debts have aided shipbuilding stability. For the most part, prices remain static except for increases of US$1-3M for extra equipment to meet environmental legislation from 2020.

Looking at the investment picture, Greece leads the way with 170 tankers committed, totalling slightly over 24 million dwt. Greece is followed by China (117) and Japan (110), but in each of the latter two cases many vessels are for the domestic construction account. Greek owners are phasing out older tonnage in favour of newbuildings. Shipbuilders are hungry for business from Greece, whose owners are cash fluid but tight-lipped over fund raising.

To date no Chinese leasing company has been used to raise finance, but Eletson Corp just signed a deal with China Shipbuilding Industry Corp (CSIC) for acquisition of four LR2 product tankers on a sale and lease-back basis (the vessels are secondhand units). The deal is the first concluded by CSIC Leasing, which hopes to rival Bank of Communications Financial Leasing (BCFL) in newbuilding financial packages that enable owners to refinance existing debt. Each of the leasing companies is a division of a large shipbuilding group. South Korea is offering similar assistance, mainly from Korea Development Bank. Financing is a fast-changing scene: many banks have withdrawn from the business, and private equity investors regard shipping as a bad long-term investment.

The most popular choice is still the 50,000 dwt MR2 product carrier: 227 units are on order. The worry is still that history will repeat itself. Hundreds of MR2s were contracted up to 2015, but recovery never came and market rates were crushed. The resultant plethora of deliveries now enjoying the recovery will hit the new tranche of newbuildings in the next two years, which could deflate the markets. Sixty-six MR2 units have been ordered so far this year, outstripping 2017 deliveries (63).

Despite the moves to renewable and cleaner energy, forecasts of the demise of the crude oil carrier have proved somewhat premature. A number of owners have invested in VLCCs and Suezmaxes. There are 126 VLCCs on order, aggregating 39,773,825 dwt. This year has proved a busy one for this type, with 51 ordered to date and 42 delivered, commissioning 16,133,592 dwt and 12,946,837 dwt respectively into the global fleet.

The Japanese majors have been busy renewing VLCC fleets as vessels age and COAs come up for expiry in two years. Some orders have recently been placed, while others are under negotiation for probable conclusion this year. Up to 20 VLCCs are stemmed for construction. NYK booked two plus optional one at Japan Marine United, as well as a further unit from Namura. The vessels will be jointly owned by a Japanese financial company, and bareboat chartered to NYK with full purchase options. Several Japanese orders stay under the radar for months before being revealed.

It is a proven fact that some shipyards are holding building slots for previously cancelled vessels with tier II engines specified. These are mainly occupied by bulk carriers, but several MR2 tankers have been concluded where the keels were originally laid in 2015 (thus qualifying any sale to specify tier II engines, saving US$1-3M for the contractors). This happened for the first time with a VLCC for Mitsui OSK, a rare occurrence of construction in China. The vessel will deliver in September 2018, doubtless with a tier II engine (saving around US$3M on refinement to meet new emission regulations). This flexible application of compliance surrounding the fitting of earlier model engines has led to around 50 ships being snapped up at cheaper pricing because keels were laid in 2015. But the majority of vessels must be at the document of contract stage only, because if so many keels were laid the shipyards in question would not be able to move on with subsequent orders.

Having endured a successful period of business after a 25% devaluation of the yen against the US dollar, the yen has now strengthened, making Japanese ships very expensive. Foreign owners always know they will pay more for Japanese ships (a 5-10% premium over those made by rivals China and South Korea) but persevere safe in the knowledge that quality ships will be delivered on time. There is evidence of more Japanese owners ordering overseas, though, as domestic owners shun higher prices. Shipyards prefer local currency payments over US dollars. For foreign business, the Japanese trading houses’ formula of bareboat charter with purchase option provides rich dividends. Norden and Torm, plus Norwegians, are big customers. In September, Imabari christened its newbuilding dock at Marugame, which will enable construction of the largest ships. Imabari initially sought a breakthrough in large container ships, but it now has eyes on VLCC tonnage also (especially in view of home-owner requirements).

The question now is will the newbuilding boom continue and overheat the market? Most owners have ordered in the faith that in 2020 (when new environmental legislation kicks in) many tankers will be sent for recycling because owners will not want to incur extra expenses to comply with legislation. Shipbuilders are likely to return to their main diet of bulk carriers. It is a fair bet that order intake for wet tonnage will drop, but the combined number of newbuildings and in-service vessels are more than enough to handle current and future demand.

TANKERS ON ORDER    
     
Vessel type no dwt
Aframax 173 18,857,760
Handymax 227 11,089,947
Handysize 124 3,459,082
Medium chemical 43 719,997
Medium products 32 741,850
Medium tanker 19 297,217
Panamax 45 3,300,748
Small chemical 32 215,506
Small products 54 347,130
Small tanker 81 426,144
Suezmax 102 16,045,443
VLCC 126 39,773,825
Total 1,058 95,274,649
     
     
     
Shipbuilder country no dwt
China 347 30,142,606
Korea (South) 308 39,467,901
Japan 204 16,555,986
Brazil 43 1,891,200
Russian Federation 35 789,087
Vietnam 29 1,376,746
Turkey 21 221,849
Indonesia 15 167,000
Philippines 10 2,378,000
Spain 9 970,000
Romania 8 473,600
Croatia 4 194,000
Netherlands 4 31,996
Argentina 3 141,000
Iran 3 315,000
USA 3 52,328
Azerbaijan 2 16,000
Bangladesh 2 6,350
Bulgaria 2 5,500
Hong Kong 2 28,000
Undisclosed 2 27,000
Pakistan 1 17,000
Singapore 1 6,500
Total 1,058 95,274,649
     
Country of shipowner no dwt
Greece 170 24,065,266
China 117 16,304,206
Japan 110 10,716,679
Singapore 93 7,122,611
Denmark 53 3,173,739
Undisclosed 48 2,471,891
Korea (South) 46 3,302,200
Norway 43 4,163,030
Brazil 34 1,284,200
Russian Federation 33 1,275,951
United Kingdom 31 2,010,498
Sweden 28 525,793
Hong Kong 22 2,416,751
Germany 20 926,099
Turkey 18 623,854
Belgium 16 1,385,484
Indonesia 16 170,500
Monaco 16 1,408,200
Venezuela 15 1,063,000
USA 14 1,385,978
Italy 10 547,348
Saudi Arabia 10 2,260,000
Netherlands 9 528,500
Spain 9 1,012,500
Canada 8 805,000
United Arab Emirates 7 841,127
Iran 6 294,000
Romania 6 246,000
Bangladesh 5 123,350
Bermuda 5 699,000
Croatia 5 444,000
Taiwan 5 380,000
Azerbaijan 4 30,060
Egypt 4 627,556
France 4 115,900
Australia 3 70,000
Switzerland 3 65,400
Turkmenistan 3 21,200
Finland 2 210,178
Malaysia 2 13,000
Vietnam 2 52,600
India 1 52,000
New Zealand 1 23,000
Pakistan 1 17,000
Total 1,058 95,274,649
     
TANKERS CONTRACTED SINCE JANUARY 2017    
Vessel type no dwt
Aframax 40 4,524,182
Handymax 66 3,277,291
Handysize 19 547,852
Medium chemical 18 295,700
Medium products 11 356,000
Panamax 3 229,000
Small chemical 7 46,900
Small products 15 80,546
Small tanker 3 13,839
Suezmax 21 3,320,256
VLCC 51 16,133,592
Total 254 28,825,158
     
TANKERS DELIVERED SINCE JANUARY 2017    
Vessel type no dwt
Aframax 62 6,701,540
Handymax 63 2,946,427
Handysize 24 680,857
Medium chemical 9 140,443
Medium products 3 44,994
Medium tanker 11 297,939
Panamax 9 645,974
Small products 19 69,757
Small tanker 29 161,946
Suezmax 48 7,403,932
VLCC 42 12,946,837
Total 319 32,040,646

 

 

Expected delivery year Total 2017 2018 2019 2020 2021 2022
Vessel type no dwt no no no no no no
Aframax 173 18,857,760 45 77 41 8 2  
Handymax 227 11,089,947 69 68 63 22 4 1
Handysize 124 3,459,082 51 36 29 8    
Medium chemical 43 719,997 12 19 10 2    
Medium products 32 741,850 14 9 9      
Medium tanker 19 297,217 8 6 5      
Panamax 45 3,300,748 18 24 2 1    
Small chemical 32 215,506 17 11 4      
Small products 54 347,130 35 18 1      
Small tanker 81 426,144 49 26 5 1    
Suezmax 102 16,045,443 38 42 22      
VLCC 126 39,773,825 29 45 48 4    
Total 1,058 95,274,649 385 381 239 46 6 1

Source for all figures in these tables: BRL Shipping Consultants. Data as at 29 September 2017