Is the VLCC market bottoming out?

7 May 2018, Global – Vessel chartering interest and rates have started to increase in the sluggish VLCC market lately. Notably, VLCC rates from West Africa to Far East, East Coast Canada and US Atlantic surged 40-50% in the spot market in the past week ending 4th May 2018 albeit from a very low base. VLCC rates from the Arabian Gulf to Far East and South East Asia have also risen 13% during the past week. Escalating geopolitical tensions are driving crude oil prices higher and could lift crude tanker shipping ton-mile demand which we forecast to grow 4.2% this year. An unprecedented level of VLCC vessel scrapping will temper the global crude tanker shipping net capacity growth to 3.9% this year based on our projection. This could support some recovery in crude tanker shipping rates in the spot market in the coming months. 

However, 2019 could still prove challenging as we expect the global crude tanker shipping net capacity to accelerate to 4.7%, outpacing our forecast global crude oil shipping ton-mile demand growth of 3.8% unless the industry can scrap more aged vessels to alleviate oversupply. We expect crude tanker shipping rates to improve more significantly from 2020 onwards as the scheduled newbuild vessel deliveries taper off and we forecast the global crude tanker shipping net capacity to grow only 1.9%, well below our projected global crude oil shipping ton-mile demand growth of 3.2% in 2020 assuming exuberant speculative vessel ordering does not return.

Stock implications: COSCO SHIPPING Energy Transportation (1138:HK), Mitsui OSK (9104:JP) and Nippon Yusen Kaisha (9101:JP) are among the world’s largest oil tanker owners and will be long-term beneficiaries among the major listed shipping lines in Asia.

Chart: Global crude oil shipping ton-mile demand and crude tanker shipping net capacity growth versus the Baltic Dirty Tanker Index (1999 to 2020E)

Chart: Global crude oil shipping ton-mile demand and crude tanker shipping net capacity growth versus the Baltic Dirty Tanker Index (1999 to 2020E)

Chart: Baltic Dirty Tanker Index (1999 to 2018)

Chart: Baltic Dirty Tanker Index (1999 to 2018)

Highest number of VLCC capacity scrapped in history and younger VLCCs are being scrapped

Due to the dismal spot rates, we have seen an unprecedented amount of tonnage scrapped in history in the global Very Large Crude Carrier (VLCC) industry. 19 VLCC vessels amounting to 5.6 million dwt of shipping capacity were scrapped in Jan-April 2018 this year.

The average age of the scrapped VLCCs has also gotten younger at 19 years this year compared to 22 years last year. Vessel demolition has effectively removed 2.5% of the global VLCC fleet capacity year-to-date.

4% of the global existing crude tanker fleet is more than 20 years old and these vessels are likely to be scrapped in the next 1-2 years, helping to alleviate the industry overcapacity.

Chart: Amount of VLCC tonnage scrapped (2009 to 2018)

Chart: Amount of VLCC tonnage scrapped (2009 to 2018)

 

Crude tanker shipping market to improve in the coming months but 2019 could prove challenging again

Consequently, the global crude tanker shipping net capacity has not grown at all since the end of 2017. The more benign supply environment could help tanker shipping companies ask for higher rates when crude oil shipping demand picks up.

Overall, we forecast the global crude oil shipping ton-mile demand to grow 4.2% y/y this year, mainly driven by China’s strong import demand, moderating from the 5.5% growth in 2017. This will outpace our projected global crude tanker shipping net capacity growth of 3.9% this year and support some recovery in crude tanker shipping rates in the spot market in the coming months. The recovery will likely be moderate as any sharp spike in rates is likely to delay the tanker owners’ vessel demolition plans.

However, 2019 could still prove challenging as we expect the global crude tanker shipping net capacity to accelerate to 4.7%, which will outpace our forecast global crude oil shipping ton-mile demand growth of 3.9% unless the industry can scrap more vessels to alleviate the industry oversupply.

We expect crude tanker shipping rates to improve more significantly from 2020 onwards as the scheduled newbuild vessel deliveries taper off and we forecast the global crude tanker shipping net capacity to grow only 1.9%, well below our projected global crude oil shipping ton-mile demand growth of 3.2% in 2020, assuming exuberant speculative vessel ordering does not return. 

Key downside risk is the resurgence of speculative vessel ordering

Newbuild vessel ordering interest has been strong in the VLCC market this year notwithstanding the current industry oversupply and weak spot market freight rates. 20 newbuild UL/VLCC orders were placed in Jan-April 2018 alone, 10% higher than the same period last year. These orders will add another 0.9 million dwt of shipping capacity to the global VLCC industry when they are delivered.

We now have 108 newbuild UL/VLCC vessels on order which will add 34 million dwt of shipping capacity to the global VLCC industry, raising the global VLCC orderbook-to-fleet ratio to 15% from 12% a year ago. The resurgence of speculative vessel ordering could cap our expected strong market recovery in 2020.

Chart: Global VLCC orderbook-to-fleet ratio in the past 20 years (1999 to 2018)

Chart: Global VLCC orderbook-to-fleet ratio in the past 20 years (1999 to 2018)

 

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Independent Research Declaration: Crucial Perspective does not own any position in the equities featured in this report nor have we received any compensation for writing this report. 

 

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