2019 saw high fleet growth and a cannibalising of product tanker cargoes by large crude oil newbuildings on maiden voyages: expect less in 2020
On the first day of the Tanker Shipping & Trade Conference, EA Gibson Shipbrokers’ head of research Richard Matthews gave an in-depth review of the product tanker market, starting with fleet supply.
He noted that product tanker fleet growth has been very high at 6.5% in 2019. This was driven by two factors: the physical deliveries of product tankers into the fleet and the slowdown in scrapping. This year has also seen an increase in product carrier substitution. He noted that 74 VLCC had been delivered and many had carried products as their first cargoes. These were cannibalising cargoes from the product tanker fleet. There were also over 100 product tankers delivered into the fleet.
On the scrapping side he noted: “This year has been a very low year for scrapping, partly because people are thinking, well, let’s see how this market develops.” While firmer freight rates have been keeping older tonnage in employment, 2020 will see an increase in scrapping. “[Gibson’s] notes that around about a hundred vessels are turning 20 years old or more next year and those vessels are going to be prime scrapping candidates,” said Mr Matthews, adding “A lot of these vessels in this age group do not have ballast water treatment systems.”
Considering the difference between entries and exits from the fleet, Mr Matthews expectations are that fleet growth will slow considerably, from the 6.5% seen in 2019 to around 2% in 2020.
On the demand side, he noted that at the start of 2019, the IEA was forecasting demand of 1.4M b/d in 2020, which was reduced to 1.2M b/d as the year progressed. The IEA forecast is predicated on global GDP growth as issued by IMF, and as this is reduced, so the IEA forecasts shrink. Therefore, the outlook for demand is currently weaker: “We think the IEA is better at forecasting oil demand than we are, so we use their figures,” he said.
Gibson’s is adding value in its forecast of refining runs, which are the crucial lever for product tanker demand. “We expect strong demand in Q1 2020,” said Mr Matthews. This is based on the growth in refining capacity and the transition to lower sulphur fuel oil. Also, for the first time since 2015, new refinery capacity is coming online in the Middle East, although Mr Matthews noted that Saudi Aramco is warning of delays in the start up of one of its units.
China has also increased its refining capacity and has added around 1.4M b/d. Exports have started from some of the new Chinese facilities and Mr Matthews expects these to increase significantly in 2020.
The new dynamic in the product tanker demand story is the influence of crude oil carriers. Mr Matthews noted that the LR1 and LR2 share of the product tanker market has been declining for some years. A similar pattern emerges with MRs. The loss of share is due in part to the growth of Aframax tankers, Suezmax tankers and VLCCs taking product tanker cargoes on the first voyage.
That influence on product tanker demand will fade in 2020, due to the lower delivery schedule of the larger crude oil carriers. It will lead to an increase in market share for product tankers and higher freight rates.
Looking specifically at the clean product tanker market, Mr Matthews noted that the two biggest drivers of volatility in the market are imports into Latin America and imports into West Africa. He felt that imports into West Africa generally would grow in 2020, but there may be a slowdown in the Nigerian market due to a crackdown on smuggling. Growth will be modest in the Latin American markets and depends on local economic growth. He noted that 2019 has seen a lot of outages in US refineries; this has impacted their capacity for imports and exports and how many are online, and their capacity will impact product tanker movements in the region.
No forecast is complete without a look at the impact of IMO 2020. Mr Matthews stated that there are a lot of assumptions required in this area and that forecasting the ramifications are far from an exact science. Gibson’s research department produced a 2020 product tanker forecast in April 2019, which then expected middle distillates (mainly gasoil) would be the primary bunker fuel and that there would be around 1M b/d of very low-sulphur fuel oil (VLSFO) in the market.
The forecast is now being revised due to reports of increases in availability of VLSFO. Mr Matthews noted that it is being report that between 1.2M b/d and 1.8M b/d of VLSFO will be in the market.
Mr Matthews does not expect the lucrative long-haul trades of gasoil from China and South Korea to Europe on MRs to grow, or the gasoil trade from the Middle East and India to expand. He feels that while the arbitrage was there in 2019, in 2020 the growth in local demand for bunkers will shrink the opportunity, and lead to an increase in intra-regional trade.
In conclusion, Mr Matthews said he expects that product tanker earnings will be higher in 2020 due to the factors outlined above, and with progressive absorption of the newbuildings into the fleet and lower deliveries, 2021 will see higher earnings growth.
The scrubber dilemma
In the discussion that followed between the panel and the delegates, it became clear that the industry has a problem with scrubbers. This was not the issue of whether or not scrubbers work, or the use of open-loop scrubbers being banned in some ports, or even if the use of scrubbers was morally correct, but rather discussed concentrated on the impact of scrubbers on the calculation of supply.
The concern was raised by Ardmore Shipping’s chief operating officer Mark Cameron, who wanted to know the impact of scrubber retrofits on tonnage availability in the light of the spike in tanker earnings and the commercial reality of planning and time retrofits.
Sovcomflot senior commercial analyst Jamie Seneviratne commented that while Sovcomflot has not yet decided on scrubbers, it has been scheduling tankers for the retrofit of ballast water treatment systems. Due to the spike in earnings and the lost opportunity costs of placing a tanker in dry dock as per the original schedule, the company found it was necessary to suspend fitments. In some cases, tankers were routed East to West of vice versa and the ballast water treatment system had to be shipped half way around the world to meet the vessel at its new location.
“If the market goes back to the levels that we saw a month ago (October 2019), I would expect to see a lot more of this kind of rejigging the vessel (location) in order to try and optimise them commercially,” Mr Seneviratne told delegates.
Teekay Tankers director of Suezmax chartering and freight trading Mikkel Seidelin agreed. Although not yet fitting scrubbers, the time quoted to retrofit was initially 20 days. During 2019, this rapidly grew to 60 days. He noted that the fallout would be fewer scrubber-equipped tankers in the market in 2020. In turn, this would reduce demand for HSFO and lead to a subsequent reduction in the price. “In the short-term, the price spread might be wider than anticipated,” he said.