The contrast between the record earnings being achieved in the container ship and dry bulk sectors and the earnings achievable in the tanker sector has rarely been so stark
The state-of-play in the three shipping sectors – tankers, dry bulk carriers and container ships – is a good example of the shipping cycles at work. Moribund in the trough phase of the cycle, there are portions of the tanker fleet that are barely breaking even.
“Is the VLCC sector still the lead indicator for the tanker fleet?” asked Poten & Partners head of tanker research and consulting Erik Broekhuizen in a mid-year research report. The conventional wisdom is that when the VLCC sector sees a surge in demand and/or earnings, there is a waterfall effect down through the smaller tanker sectors.
A number of factors have blurred this image. The pandemic led to a sudden drop in crude oil demand, and a subsequent demand for long-haul crude oil. The ongoing sanctions against long-distance exporters, Venezuela and Iran, have contributed to a fall in VLCC demand. On the supply side, the last few years have seen an increase in the so-called “rogue” fleet of VLCCs, over the acceptable chartering age of 15-years old, being sold on for further trading into a shadowy world of stealth AIS and STS activities to load sanctioned cargoes.
The invasion of Ukraine by Russia has changed the outlook for a post-pandemic recovery and the continued lockdown in China is keeping demand from growing. The main beneficiaries of the change in trade are the Suezmax and Aframax sectors – Poten & Partners points to the seven-fold increase (Q4 2021 vs Mar-May 2022) in crude oil exports from Russia to India from ports that cannot accommodate VLCCs. In fact, it noted that VLCC calls to India actually fell.
“Container ship charter rates in 1H 2022 rose to a record average of US$86,000 per day”
The VLCC fleet did not benefit significantly from Europe pivoting away from Russian crude oil. Again, the Suezmax and Aframax tanker sectors have profited from increasing trade from West Africa and the Atlantic Basin.
One person who understands the shipping cycles very well is Norwegian shipowner John Fredriksen. Many times in the past has he taken advantage of the trough stage in the cycle to amass a relatively cheap fleet and take advantage of the boom phase. This is one of the motivations for the merger of his company Frontline and that of Euronav, to form a combined group of 146 vessels, consisting of 68 VLCCs, 56 Suezmax tankers, 20 LR2/Aframax tankers and two FSO vessels. Some shareholders are resisting the merger of the companies, but it seems inevitable the fleets will combine.
In contrast, dry bulk carriers have seen the second best first-half of year earnings in 2022 since the tail end of the last dry bulk carrier boom in 2008. The average was US$24,000 per day earnings, according to the Clarkson Research Services (CRS), the shipping research division of shipbrokers Clarksons. The company noted that average earnings in 1H 2022 vs the 10-year average for dry bulk carriers was a very healthy 100% higher.
But even these firm earnings seem weak compared to some of the container ship sectors. Although freight rates for container slots on vessels stay within “normal” bounds, the ongoing port congestion at the mainly discharge ports on the US West Coast has now spread to the mainly loading ports in China, resulting in a physical shortage of container ship available to charter. As a result, CRS reports that container ship charter rates in 1H 2022 rose to a record average of US$86,000 per day. In the 4,400 teu sector, the average charter rate in the first six months of 2022 was 400% higher than the 10-year average!
It was against this background that Hyundai Merchant Marine (HMM) announced a huge expansion in its dry bulk and container ship fleets. HMM’s latest strategy is to increase its dry bulk fleet from the current 29 vessels to 55 ships. The HMM container ship fleet is scheduled to grow from the current 820,000 teu to 1.2M teu by 2026. Uncomfortably, 2026 will also mark the 10th anniversary from HMM’s bankruptcy after its last expansion phase. At the time, HMM’s fleet of 98 container ships, including 39 owned ships, had a global market share of almost 3%. Despite its huge turnover, a cashflow crisis saw suppliers withdraw credit, resulting in the then biggest maritime bankruptcy.
The inefficiencies that are driving the extreme growth in earnings in the container ship sector are unlikely to last for ever, and fundamentals such as the physical supply of capacity in a shipping sector, versus demand for its usage, can be very sobering. In the case of the tanker fleet, poor earnings and uncertainty over fuels has been a disincentive to order new vessels and the orderbook has diminished to 5% of the current fleet. The dry bulk sector’s orderbook is little better at 8% of the current fleet.
The container ship sector orderbook, at 28% of the current fleet, is very strong and along with the LNG sector (40% of current fleet) is squeezing out other ship types from the shipyards. While container ship owners are willing to pay very high prices (23,000 teu was US$146M in 2019, now US$210M), the yards are going to fill every available slot for the foreseeable future with these high value-adding vessels.
This price escalation is now dragging up other sectors. Even though very few VLCCs have been ordered, the current price is US$118M for a standard vessel. For LNG dual-fuel power, another 10% is required. In 2019, the average price was US$92M.
© 2023 Riviera Maritime Media Ltd.