Archives for posts with tag: crude tanker fleet

On 14th August 1948, Don Bradman, Australia’s greatest cricketer of all, walked out for his last test match innings, at the Oval in London. Over 52 test matches, his average score was an astonishing 99.9 runs. All he needed was 4 runs for a test match average of 100 (sorry non-cricketers, you’ll have to check it out on Wikipedia). But he was bowled out second ball by leg spinner Eric Hollies.

Two Simple Rules

The moral of this sad story is that however experienced you are, two basic rules apply. Keep your eye on the ball and watch out for spinners that behave erratically. That seems to apply pretty well to today’s tanker market. The fantastic revival of tanker earnings started in October 2013, was interrupted by the summer dip in 2014, then picked up in October 2014. Since then it has not looked back, with crude tanker earnings generally averaging $40-$50,000/day. There is a little weakening right now, but sentiment appears to be confident for the winter.

Demanding Wicket

Against the background of a 2% fall in seaborne crude oil trade in 2014, US fracking and a lacklustre world economy, this earnings surge was a surprise. But there were some mitigating factors. Low oil prices are boosting demand and the IEA has revised up its forecast for growth in global oil demand in 2015 to 1.6m bpd.

Growth on long-haul trades has also helped. Between 2011 and 2014 Caribbean tonne-mile exports increased by 36%, largely due to increased shipments to China and India. That sounds good, but many VLCCs repositioned with a backhaul e.g. West African crude for Europe, and maybe a Transatlantic fuel oil cargo. Although handling fuel oil is time consuming, especially when it involves STS (ship to ship), this undermined some of the “tonne-mile” effect. And so did cargo-leg speeds, which appear to have edged upwards over the last year. But while the part played by demand may not seem entirely clear, there has still been a notable improvement in crude trade volumes this year, with seaborne shipments to major importers estimated to have increased by 4% year-on-year in 1H 2015.

It’s Supply, Stupid?

When we turn to supply, the picture becomes clearer. Until the summer of 2013, the crude tanker fleet was growing at 15-20m dwt pa. That’s about 5-6% per annum growth, well above demand growth. But by October 2013 growth had fallen to 2%, producing a nice year-end spike. The tanker supply slowdown kept on going and by July 2014 the crude tanker fleet was declining. Admittedly the growth has
edged up so far in 2015, but only to around 1-2% per annum.

Nasty Spinner In Sixteen?

So there you have it. Tanker investors have scored well in the last year, but, like Don Bradman, they must remember rule two and watch out for the spinners. Although fleet growth is sluggish, the crude tanker orderbook for 2016 could produce a “googly” as it pushes fleet growth back up to 6% (depending on demolition). Even with positive demand, tanker investors are going to have to keep their eye on that ball and hope it breaks the right way. Have a nice day.

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Successful investors are always looking to get on the right side of an uneven bet, and the shipping market has had an uneven look to it so far in 2015. There has been some improvement in earnings, and the Clarksea Index has risen to around 30% above its 2014 average. However, the upside has not been spread equally across the sectors at all, and the same could be said of trends in capacity growth.

Uneven Territory

Looking at the key markets, the LPG sector has continued to be a star performer, and tankers have had a great run in the year to date too. Containerships have seen charter earnings increase from historical lows, but poor old bulkers continue to see rock bottom levels. It’s an uneven picture to say the least. However, one factor that appears to be more even is the volume of capacity entering the fleet.

Flattening Out

Shipyard output looks fairly steady, with the 6-month moving average of deliveries averaging around 7-8m dwt per month for about a year and half now. As a result fleet growth has slowed from the c.9% level seen in 2010-11, and today the projection is for a fairly steady rate of growth in total cargo fleet capacity, with expected expansion of 3.5% this year and 4.1% in 2016. Is this good news? A high level view may suggest that, with a fair wind on the demand side, more moderate supply side growth at least should not make the underlying market surplus any worse. However, looking in more detail it is clear that the rate of capacity growth is highly uneven across sectors too.

Speeding Up

Supply growth in the key cargo vessel sectors can be split into three. In the fast lane we have those sectors where fleet growth is expected to speed up in 2016. LPG carrier capacity growth already looks rapid (VLGC capacity is projected to grow by 18% this year) and will accelerate again next year. Crude tanker fleet growth will also speed up (VLCC capacity is projected to expand by 6% in 2015). What sort of ‘landing’ might that bring for these markets? Capesize bulker fleet growth will ramp up to 5% in 2016 (as if this sector needed any more pressure), and after a few years of shrinkage the 1-3,000 TEU boxship sector will at last see some (much needed) expansion (1%).

Slowing Down

Supply growth in other sectors looks set to remain relatively steady in 2016 compared to 2015, but there are also a number of sectors where it is projected to slow in 2016. LNG carrier and Handy bulker supply growth will start to recede. Notably, expansion in the large (8,000+ TEU) boxship sector will begin to slow (20% in 2015 to 13% in 2016) whilst the medium-sized boxship fleet will staunchly continue to decline (by 2% in 2016).

So, market earnings are uneven today and despite the big picture suggesting that capacity growth will remain moderately steady across 2015 and 2016, delving into the detail suggests that supply-side impetus will be uneven from one sector to another. Some sectors might be start to feel fresh pressures whilst others might breathe a sigh of relief. Those aiming to get on the right side of the bet should look closely. Have a nice day.

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Seven years into the recession, the tanker market is blazing away, with VLCCs earning over $50,000/day and Aframaxes not far behind. It’s an amazing development which leaves investors pondering whether this is, in Churchill’s famous words, “not the beginning of the end, but maybe the end of the beginning”. Analysts now wonder if it’s worth the risk of going out on a limb and calling “turning point”.

Potential Paradigms

Whatever the outlook, it’s worth pausing to enjoy the moment – and, perhaps, reflect that nothing like this happened in the 1980s. So something has obviously changed, but over the long-term it’s hard to see what it is. Since 2007, the tanker fleet has grown much faster than seaborne oil trade. We know from experience that when there’s an underlying surplus, spikes rarely last more than a few months and paradigm shifts making “this time different” are rarer than hen’s teeth, if not impossible.

Disappointing Demand

Let’s start with the crude oil trade, which fell by 6% from 38.4m bpd in 2007 to about 36.3m bpd in 2014. OECD oil demand has declined since 2007, with North America down 8%; Europe down 12% and Japan down 13%. So there’s not much joy there. Add an extra 4.6m bpd of oil production in North America and seaborne crude imports dropped by 2.1m bpd. Of course, non-OECD imports have increased, as has products trade, but overall the oil trade has only increased 2.8%, from 55m bpd in 2007 to 56.5m bpd in 2014. A tonne-mile approach pushes the growth up to 7.9%, but that’s still only 1.1% pa.

The Flighty Fleet

Meanwhile the tanker fleet has been buzzing. At the end of 2007, when the credit crisis was just getting started, it was 383m dwt, but since then it has grown by one third (126m dwt) to 509m dwt. Of course, macro statistics are always a bit fuzzy, but an increase of less than 10% in trade and 33% in ships tells a pretty clear story that there is probably lots of ‘surplus’ tonnage tucked away.

A Logical Disconnect?

Such a surplus should surely “cap” rates. But clearly this is not happening, so what’s going on? There are a few explanations. Firstly, seasonality; global oil demand was 2.1m bpd higher in Q4 2014 than in Q2. Assuming most of that is translated into trade, that’s a 4% increase which, over a short period is enough to get things started. Add to that the surge in speculative cargoes held at sea, and demand is motoring. Finally, throw in the reluctance of owners to speed up, and the limited growth in the crude tanker fleet in recent years, and the recent rates look more convincing.

Cyclical Or Structural?

So, simple numbers don’t always give you the whole answer, but there’s never any harm in looking at the big picture. If the simple interpretation is right, things might ease off. But the real dilemma is probably the underlying surplus. Are today’s speeds the ‘norm’ for the future? With bunkers at $300/tonne, the answer is “maybe”. But given time, it could well become a key question. Have a nice day.

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