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Private equity is shying away from tanker newbuildings

Mon 31 Jul 2017 by Barry Luthwaite

Private equity is shying away from tanker newbuildings
468 tankers are expected to deliver into the market this year

A bullish tanker market raises the spectre of overtonnaging

It was a very brisk two-month period for newbuilding business as shipbuilders redoubled efforts to win tanker orders, which to a large extent is still the only game in town. Prices are barely moving up. Leasing deals with purchase options are working wonders for some owners that want vessels but find finance hard to raise in a difficult climate.

Vessels on order and delivery schedule
Expected delivery year   Total 2017 2018 2019 2020 2021 2022
vessel type no dwt no no no no no no
Aframax LR2 199 21,724,706 69 79 41 8 2  
Handymax (MR2) 207 10,075,579 79 61 45 16 5 1
Handysize 135 3,696,181 58 36 32 9    
Medium chemical 41 685,747 16 19 6      
Medium products 32 740,350 16 9 7      
Medium tanker 20 313,634 9 5 6      
Panamax LR1 47 3,448,182 23 22 2      
Small chemical 30 199,606 17 11 2      
Small products 55 355,505 39 16        
Small tanker 81 435,344 51 24 5 1    
Suezmax 110 17,153,620 52 42 16      
VLCC 125 39,458,009 39 45 41      
Grand total 1,082 98,286,463 468 369 203 34 7 1


The relentless march of product carrier tonnage continues to raise fears of overtonnaging. MR2 50,000 dwt units still rule the roost and prove the most popular with owners. There were moves for LR2 wide-beam Panamax vessels, including first-time investment by some. The most distinguishing feature is the plethora of orders being won by South Korea as debt problems ease. In the first six months of this year its domestic builders gained 188 tankers, dominated by the addition of 35 VLCCs. This has given a tremendous boost to shipbuilding: with dry and box sectors struggling, tankers continue to remain a lifeline for shipbuilders.

The strength of tanker business is vividly illustrated by the statistics

The strength of tanker business is vividly illustrated by the statistics. In the space of just two months a remarkable 72 vessels were added. In overall terms the actual order backlog stands at 1,082 vessels aggregating 98,286,463 dwt, down from 1,129 units totalling 103,617,963 dwt two months previously. The figures underline the increasing volume of new deliveries, which now totals 223 vessels aggregating 22,165,650 dwt against 188 new orders in 2017 totalling 20,915,715 dwt. The domination of VLCC business is underlined by the fact that it occupies 52 per cent of the tanker orderbook in dwt terms.
In theory there are additional vessels on the global orderbook as ‘hidden agenda’ business is concluded behind the scenes and not reported. This happens repeatedly in Japan, but is now surfacing with some Korean orders being confirmed weeks after conclusions. Some owners will not reveal business until refund guarantees are secured. 

A pleasing feature for builders is the size of individual orders

A pleasing feature for builders is the size of individual orders. Single-vessel contracts are indeed a rarity. Most orders, with prices so low, also have options attached. Some owners have returned to changing vessel types. The first victim and great survivor from the 2008 financial crash – Hong Kong-domiciled Korean owner Cido Shipping – cancelled a series of car carriers and renegotiated them into two VLCCs and eight MR2 50,000 dwt product carriers. The reason for the change was a belief in a stronger tanker market over a declining car carrier scene. It is doubtful this will be a trend, not least because so few vessels of other types are eligible.

Some owners are looking to improve earnings by entering new trading sectors. One such move came from BW Pacific, which invested in six plus optional two 115,000 dwt Aframax LR2 product carriers. The selection of Daehan to build the wide-beam vessels yielded relatively early delivery dates from early 2019 at a cost of US$44.5 million each (as against a price elsewhere of US$46 million apiece). The difference is that Daehan will supply the six firm vessels with IMO tier II engines, but confirmed these will be the last for newbuildings.

The bullish tanker market recently induced merger negotiations. DHT Holdings finally sealed a merger deal with BW Group for the whole of its VLCC fleet, acquiring nine existing vessels and taking over two newbuildings. Following this, BW Group placed orders for two more VLCCs, dispelling rumours it would quit this sector. Hafnia Tankers is said to be involved with two plus optional two MR2 newbuilding product carriers at CSSC Offshore and Marine Engineering, but this is strictly denied by the Danish owner. Hafnia is currently involved in a merger with Diamond S Shipping that would see 33 product carriers join the Hafnia fleet. There is a 50/50 chance of completion. A final merger completed the alliance of Scorpio Tankers and Navig8, with the former taking control of Navig8’s products fleet. Such asset plays underline the bullish tanker market. The strange thing about these mergers is that since conclusion, both Navig8 and BW Pacific reacted with more new orders for individually owned fleets. The new trend is to buy sections of tanker fleets.

One disturbing feature of the newbuilding market is the withdrawal of private equity

One disturbing feature of the newbuilding market is the withdrawal of private equity for newbuildings as investors remain nervous. It was always felt that private equity – which initially fuelled a plethora of orders for tankers, bulk carriers and containerships – would come to a halt. Large private investment remains intact due to the great financial commitments, but there is major difficulty in persuading investors to part with more cash despite a bull trading market. It is increasingly difficult for IPOs to succeed, but a number of owners have successfully used Norway’s over-the-counter financial system. 
The boom in ordering will not end yet. KOTC, NITC and Trafigura are all poised to order new ships. In the case of Trafigura, 22 firm plus optional 10 tankers are earmarked, though the commodities trader has not formally confirmed. Some may be owned by other owners and chartered. The orders will be shared between Hyundai and New Times Shipyard, with at least a further four VLCCs coming from KOTC and NITC.

The Greeks continue to march ahead with investment. Collectively they account for 221 vessels aggregating 29,278,876 dwt, which is by far the largest total in both unit and dwt terms. China continues to provide finance for overseas builders and owners via shipping divisions of state-owned banks. Some of this is now surfacing for South Korean construction, with the latest covering four Suezmax tankers for Stealth Maritime in its first move in this sector. China’s Bank of Commerce and Financial Leasing (BOCOMFL) will finance and nominally own the ships under bareboat charter to the Greek owner, which will have the option of eventually buying the ships outright.

While South Korea rebuilds its shipbuilding industry and has the leading order intake for 2017 to date, the principle task now is to reduce debts. In terms of order backlog, South Korea leads with 310 tankers aggregating 40,635,688 dwt. Aggressive and competitive marketing, together with restructuring, has enabled a more slimline industry to get South Korea back on track. In the world shipbuilding league, South Korea is now narrowing the gap (in unit terms) with China, with 310 versus 357 vessels respectively. The leading dwt total, though, is some 9 million dwt more than collective Chinese newbuildings. Japan remains a respectable third with 218 tankers, which will eventually commission 16,620,294 dwt into the global fleet.

In an interesting move Damen Shipyards purchased Daewoo’s Mangalia site in Romania, but does this mean the group will build bigger ships and even tankers there? Certainly they will begin there as builders of four Aframaxes and one Suezmax, which are in advanced stages of construction, albeit delayed.
 

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