Vortexa senior analyst Ioannis Papadimitriou, Galbraith’s head of research Annika Bartels and McQuilling Services commercial director Stefanos Kazantzis examine the prospects for tanker trades in the year ahead
Vortexa senior analyst Ioannis Papadimitriou took on the difficult task of explaining the impact of Russia’s invasion of Ukraine on the tanker trades during the first session of the Tanker Shipping & Trade Conference in Athens in November.
He began by explaining the background to the latest surge in tanker rates. This, he noted, is due to ton-mile demand, which has actually surpassed pre-Covid pandemic levels, resulting in an increase in demand for VLCCs and Aframax tankers. “This has resulted in a more sustainable freight rate development,” he said.
In comparing the pre-Russian invasion of Ukraine (1Q 2022) and the post-invasion era (April to August) Mr Papadimitriou noted that there was an increase in the average number of voyages but the average mileage dropped. This was due to employment of VLCCs on short-haul routes west of Suez on European bound short-haul destinations.
The latest situation is that China has come back into the VLCC market and compared to earlier in 2022, ton-mile demand on the US Gulf to China route has almost doubled. Migration of VLCCs into the Atlantic Basin is having a two-fold impact, increasing freight rates on other routes into China and allowing rates to raise in the other sectors, such as Suezmax tanker and Aframax tankers, where VLCCs had been cannibalising those sectors.
It is these two sectors that are benefitting most in the post-invasion market in Asia and India. “Aframax tankers employed on Russian routes rose from 40 vessels pre-invasion to around 60 vessels,” said Mr Papadimitriou. He noted an even greater impact on the Suezmax Russian trades, which saw employment increase from five vessels to around 25 to 30 vessels in November.
“China has been diversifying its sources of crude oil and the recent weeks have seen an increase in loading barrels from OPEC sources”
Vortexa’s analysis of Russian crude oil entering Chinese state-owned and independent-owned oil refineries shows that around 10M barrels were recorded in October, the highest level since June 2020.
“Can we expect this trend to continue?” asked Mr Papadimitriou. “The answer, according to the latest behaviour from China, is no.” He noted that China has been diversifying its sources of crude oil and the recent weeks have seen an increase in loading barrels from OPEC sources.
He also noted that crude oil supply has other issues outside Russia. There is still civil unrest in Libya and Yemen and long-term issues in Venezuela. In addition, there are signs that under-investment in West Africa, especially Nigeria, is beginning to have an impact.
“Forget earnings: these have no relationship to newbuilding prices”
So where do the opportunities lie and what are the trading prospects for 2023? Galbraith’s head of research Annika Bartels presented the Tanker Shipping & Trade Conference with her view of the outlook.
Looking at the supply situation, the standout issue is the lack of newbuilding orders: “Talking about the fleet in terms of orders placed at the yard, we are seeing historical low numbers.”
Ms Bartels noted that a ratio of 5% orderbook to the fleet is a level not seen since the 1990s. The reasons are many, but LNG carriers and containerships are occupying newbuilding slots in the yards. A high demand for newbuilding slots allows the yards to push up newbuilding prices.
McQuilling Services commercial director Stefanos Kazantzis had a different viewpoint on tanker fleet renewal: “There is what I call an investment dilemma,” he said. The usual questions on financing, owners requirements and charterer’s expectations have been muddled by the decarbonisation aspect and CII.
He noted that there is going to be a slowdown in deliveries in 2023 through to around 2025. He disagreed that there were no slots available for tankers: “There are slots for VLCCs for 2025 [delivery],” he said. The main issue was newbuilding prices, but not for the reasons given elsewhere.
“Yards are quoting US$115M for a VLCC. Is that really the price?” he asked, adding, “The answer is no.” At that level, the breakeven is over US$42,000 per day, which is not a realistic long-term charter based on historical rates. “I think every shipowner here [in the conference room] knows that just from experience. If you do not see any Greeks ordering ships right now, it is because they know, historically, it is not the time to invest.”
Mr Kazantzis noted the first factor for newbuilding pricing is yard utilisation. While the shipyards currently enjoy high utilisation from all the LNG carrier and containership orders, this will drop as those vessels are launched. The yards will need to replace the forward orderbook and that is when pricing will become more aggressive.
The second factor is steel prices. “Forget earnings: these have no relationship to newbuilding prices,” said Mr Kazantzis. “It is a very small correlation that is not even statistically significant,” he added. Steel prices are key and when the steel plate price falls, so will ship newbuilding prices. In this respect, he noted that the 12-month forward steel plate price is already in backwardation.
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