The 2010s will go down as a decade of unremarkable growth, but it was also the decade that saw China take a quarter of global trade and a third of the orderbook
Global seaborne trade in the last decade grew by only 3.1%, compared to 4.3% in the 2000s, according to Clarksons Research Services (CRS) data. If anything, the 2010s will be remembered as the decade of China’s consolidation of the global seaborne trades.
China’s share of seaborne trade grew from 2% in the 1980s, to 5% in the 1990s. Its joining the WTO was key to a boom in globalisation and its share of seaborne trade then rocketed to 18% in the 2000s. It should come as little surprise then that the 2010s will be remembered as the decade that saw China consolidation its grip on global seaborne trade.
Over the last decade, China was responsible for 25% of seaborne trade. This required cheap ships to import raw materials to fuel its growth and to export the finished products. By the end of the 2010s, Chinese shipyards held 34% of the global all ship-type orderbook.
During these decades, tanker average earnings slipped. In the 2010s, tanker average earnings were US$16,413/day, compared to US$31,000/day in the 2000s. Charter rates were much firmer in the 2000s, with the average one-year VLCC timecharter rate at US$48,000/day, versus US$30,400/day in the 2010s. This was during a period of growing demand: the global crude oil trade grew from an average 1,807M tonnes per annum at the end of the 2000s to an average 2,001M tonnes at the end of the 2010s.
2019 versus 2018
In 2019, global trade only grew by 1.1% year-on-year, to 11.9Bn tonnes – the lowest growth rate since the financial crisis of 2008 (tonne-miles did marginally better at 1.6%). Over this period, the global oil trade actually fell year-on-year to 3,053M tonnes, a fall of 1.1% on 2018 (CRS figures).
On the earnings side, the tanker market was turbocharged by the huge spike in rates in October 2019, which resulted in VLCC earnings that year averaging US$41,000/day, a 166% increase on the 2018 figure. The short-term nature of the tanker earnings spike did not result in a rush of contracting, but it did bring a virtual halt to scrapping. Scrapping shrunk to 3.5M dwt in 2019, a fall of 83% on 2018: the tanker fleet grew by 6% year-on-year.
This apparent positive growth in tanker fleet supply in 2019 is deceptive however, argues Teekay Tankers director of research and commercial performance Christian Waldegrave. He notes the effective fleet supply growth was much weaker and says that a significant number of VLCCs are tied up in floating storage (circa 25 VLCCs off Singapore and Malaysia), retrofitting, and US sanctions. Therefore, effective fleet growth has been minimal, adding to rate volatility. Coupled with this was a change in trade patterns. Mr Waldegrave noted an increase in the availability of crude oil in the Atlantic Basin, from Norway, Brazil and the US Gulf, at a time when OPEC is reducing production.
Mr Waldegrave differs from other tanker analysts in his belief that the impact of this has not been felt on tonne-miles (volume of cargo carried multiplied by distance and the most widely used measure of demand), but rather in sea miles. Tonne-miles may have actually decreased, but tankers are undertaking more ballast voyages into the Atlantic, increasing sea miles. An increase in non-cargo carrying voyages is an indicator of increasing inefficiency in the tanker market.
The increasing demand for tankers, especially larger tankers like VLCCs, to undertake 140 day voyages from the US Gulf to South Korea should have driven an increase in contracting in 2019, but overall tanker contacting fell 17% to 22.5M dwt. The high level of deliveries in early 2019 resulted in the tanker orderbook shrinking year-on-year by 26% to 51M dwt.
The dilemma now facing tanker owners is which specification of vessel to order to achieve IMO greenhouse gas targets, while remaining competitive and profitable across the life of the vessel. LNG is the obvious alternative fuel, and a recent VLCC newbuilding order has been converted to LNG power. In early 2020 it was reported that COSCO Shipping Energy Transportation (CSET) of China will pay an additional US$6M for one of its VLCCs on order at Dalian Shipbuilding, allowing it to be re-specified with LNG dual power. Tanker Shipping & Trade has subsequently learned that the real additional cost is closer to US$15M and that the lower reported cost does not include subsidies.
This disconnect between tanker demand and contracting should be viewed against a background of falling VLCC newbuilding prices. According to CRS, VLCC guideline newbuilding prices fell by 0.5% in 2019 to US$92M. This indicates an LNG-powered dual-fuel VLCC built in China will cost in the region of US$117M. And while many new green and alternative fuel alliances in the shipping, trading and finance sectors are making loud noises about the need to meet IMO targets and decarbonise shipping, there have been few firm commitments from those that really count – the charterers. That is the tanker owners’ dilemma: will charterers ‘walk the talk’ and pay the premium required for a fleet of LNG-powered VLCCs?
Some owners put these worries to one side and ordered new, but relatively conventional, VLCCs in the period November to December 2019. A total of 10 orders were placed during this period, including four by China VLCC at Dalian, two by Maran Tankers (Angelicoussis) of Greece at Dalian and sole Hunter Group order, also at Dalian.
The turnover of second-hand tankers increased in 2019, with CRS managing director Stephen Gordan noting: “For the first year since 2014, reported tanker S&P volumes (34M dwt) were higher than bulk carriers (33M dwt) reflected in tanker pricing increasing by 15-20% across the year, while bulker pricing was more mixed.”
The most recent trading sales include a Euronav sale and leaseback agreement with Taiping and Sinopec Financial leasing for three VLCCs. Nautica, Nectar and Noble, all built at Dalian Shipyard, were sold for a net en bloc price of US$126M. The vessels were delivered to the new owners on 30 December 2019.
Euronav has leased back the three vessels under a 54-month bareboat contract at an average rate of US$20,681 per day per vessel. The vessels will be redelivered to their new owners at the end of the contract. Euronav has purchase options exercisable after the first year.
The transaction produced a capital gain of about US$23M and will be booked as an operating lease under IFRS. The transaction is expected to generate US$66.6M in cash after the company settles the debts associated with the vessels.
Euronav chief executive Hugo De Stoop said the price the VLCCs fetched would help the company recycle the cash into younger tonnage, adding: “At the same time we maintain our exposure to a freight market that is currently characterised by robust market fundamentals and which is, we believe, in the early stages of a sustained cycle of elevated cash flows.”
It is clearly too early to say whether the coming decade will be remembered as the Roaring Twenties of the tanker trade, but come the end of the 2020s, it will be fascinating to see which ultra-low carbon emission VLCC charterers were happy to pay for.