After four months without orders, there is a genuine concern among shipyards at the direction of the VLCC sector
A new order from Oman Shipping is only the 15th VLCC newbuilding contract placed to date in 2019, with 13 of those placed in January. The June Oman Shipping deal was for a reported US$91.3M, which is around US$3M less than a similar VLCC ordered at the same yard a year ago. According to Clarkson Research Services (CRS), the number of VLCCs on order is now 81 vessels with capacity of approximately 25M dwt. This represents 10% of the current VLCC fleet.
Compared to the VLCC sector, there have been fewer Suezmax tanker orders (13 to the end of June 2019), but there has been a steady flow of orders from Greek family-owned tanker operations. Three orders were placed in May 2019 – two at Daehan for the Greek Lemos family company Enesel and one at Japan Marine United for Samos Steamship, part of the Inglessis family group.
In June, Avin International (the Vardinogiannis family company) placed two contracts for Suezmax tanker newbuildings with Hyundai Heavy Industries at a reported US$64M each.
The aforementioned Daehan shipyard was active in the Aframax sector, winning four contracts from Minerva Shipping, Greece (part of the Martinos family business) for a reported US$200M en bloc. All the vessels are due for delivery in 2021 and are reported to have been ordered without scrubbers.
With 48 live tankers, John Fredriksen’s Frontline group is one of the largest tanker owners but had not ordered a new vessel since May 2017 until in June the group placed newbuilding orders with Shanghai Waigaoqiao Shipbuilding for two LR2 tankers at a reported US$46.7M. Maersk Tankers has also ordered LR2 tankers in China. Dalian Shipbuilding is set to deliver the four tankers in 2020. The price was not reported.
One interesting development taking place in the newbuilding market is the sharing of orders. A Navios VLCC ordered at the end of 2018 at Imabari Shipping in Japan is to be built at Mitsubishi Heavy Engineering. This follows the co-operation agreement signed by Mitsubishi, Imabari, Namura Shipbuilding and Oshima Shipbuilding in 2017 as a way of supporting the Japanese shipbuilding industry.
The demolition market has also been relatively quiet, with just two VLCCs sold for demolition in May and June 2019. The 1996-built Watban was sold by Bahri for a reported US$440/ldt and Navios Maritime Acquisition sold the 2001-built Shinyo Ocean to a recycling yard in Bangladesh. The vessel had been involved in an incident. On 24 March 2019, the Shipping Corporation of India LNG carrier Aseem collided with Shinyo Ocean, which was in ballast at the time of the incident and received an LNG carrier-shaped incursion to the bow.
Indian election stalls market
May also saw the sale of two Teekay shuttle tankers to Indian breakers for a reported US$430/ldt, a somewhat firm price which may be due to the extra shuttle tanker equipment on board. GMS, the largest facilitator of ships sold for recycling, noted that the demolition market had been on hold, waiting for the result of the Indian general election: “The landslide victory for Prime Minister Modi in India has seen the domestic market shoot to the forefront of proceedings, as optimism returns to a previously nervous sector. In truth, the decline of the Bangladeshi market and the consistent inadequacies of Pakistan over the last three quarters have meant that India was likely to be at the top of the standing by default, especially as the market heads towards the monsoon season.”
The impact on tanker fleet supply and demand from the additions and deletions is that the VLCC fleet supply is now around 4% greater than demand in 2020, rising to 6% over-supply in the Aframax sector.
In the sale and purchase market, the VLCC sector is proving to be a popular choice. An increase in the volume of second-hand tanker sales indicates increased demand; looking at the value of sales gives a snapshot of pricing, but a more insightful measure is the relationship between five-year-old tankers and the newbuilding price. For VLCCs, this ratio is looking firmer so far in 2019.
The five-year-old tanker sector is in many ways the perfect vessel. It is old enough that all the engineering snags of a newbuilding have been sorted out, but not so old as to be of a higher consumption generation, or too old for some charterers’ stricter age requirements. But the main advantage is that the vessel is available for work immediately. A ratio of 100% indicates that five-year-old prices are level with newbuilding prices.
In times of extreme demand, the ratio has gone above 100%, but the VLCC five-year-old versus newbuilding price ratio had been as low as 71% in 2018.
According to CRS, the ratio of five-year-old versus newbuilding prices in the VLCC sector has risen to 79% so far in 2019, indicating that sentiment in second-hand VLCC tonnage is increasingly positive. This has even extended to vintage VLCC tonnage.
Where does this sentiment come from? CRS reports that growth in VLCC deadweight demand is expected to reach 4.5% year-on-year, driven by Atlantic and Brazilian long-haul supplies to China.
The trading VLCC fleet is expected to grow by 2.2% in 2020, slightly lower than originally forecast, due to the increase in VLCCs out of the market due to retrofits.
At the same time, VesselsValue reports that the total number of tanker newbuilding orders is down 47% for H1 2019 compared to H1 2018.
VLCC orders are down 60% for 2019 year-to-date, compared to the same period in 2018, according to the shipping data provider.
Looking at VLCC sales at the halfway stage of the year, two trends become apparent: scrubbers and vintage vessels.
In the first half of 2019, tanker sale and purchase activity has been weak ,with only 141 sold with a total investment of US$2.8Bn, according to VesselsValue.
The shipping data provider ascribes the decline to the wariness of investors, poor market sentiment and earnings, changing global regulations and an increase in sanctioning activity coming from the US. It notes that modern assets have performed the best with resale prices for VLCCs in particular reaching a recent five-year peak at US$98M. This is partly due to rising newbuilding costs but also a function of owners looking to reposition themselves with modern high-spec assets in time for IMO 2020. Recent VLCC time charter fixtures suggest that charterers are currently willing to offer premiums for scrubber-fitted vessels. A prime example of this being a 2018-built scrubber-fitted VLCC Maria P Lemos being fixed to Mercuria for three years at US$43,000 per day, a rate that has not been seen in over four years.
But there was also good news at the older end of the market. The shipping data provider noted that there has been a firm market for VLCCs of 15 years and older, and since the beginning of 2019 nine were sold of this vintage.