The land of diminishing returns

The price of crude oil has continued to decline into 2016 and, for the first time since April 2004, both Brent crude oil and WTI light have traded below $30 per barrel. Tanker shipping has capitalised on this unusually low price and, for the time being at least, demand remains high. But is it inevitable that the tanker sector will head the way of the crippled dry bulk fleet before the end of this year? Experts seem to think that it’s only a matter of time.

BIMCO expects the tanker fleet to grow by as much as 5.9% in 2016, while demolition activity remains subdued. It also anticipates that prudent owners and operators will begin to fix on long-term charters now that the three-year timecharter freight rate for a modern VLCC has reached $44,000 per day and the one-year timecharter rate stands at $58,250 per day.

However, with a substantial amount of crude oil pouring into stockpiles around the world, there is a limit to how long such trends can continue, according to BIMCO. The end of winter in the northern Hemisphere will reduce demand for crude oil and oil shipments will not be able to grow as they did in 2015. The tanker markets will feel the effect of this.

Global shipping consultant Drewry agrees. In its latest edition of the Tanker Forecaster, it predicts steady freight rates in the first few months on 2016, but expects that these rates will soften towards the end of the year due to an influx of tonnage.

Drewry’s lead analyst for tanker shipping, Rajesh Verma, said: “[Low] crude prices resulted in high refinery runs and stocking activity, which in turn caused a surge in crude and products inventories. Soaring inventory is expected to curb trade growth in 2016 as it will reduce the needs for imports.

“Looking further ahead, and with the resultant decline in tonnage utilisation, freight rates are expected to fall in the next two years. However, despite the decline in spot freight rates, tanker earnings will still be active thanks to the continued weakness in bunker prices.”

On the commodity side, the International Energy Agency expects demand for crude oil to grow by 1.2m barrels per day in 2016, but an oversaturated market means that neither the lifting of a US ban on exports of crude oil nor Iran’s expected increase of oil exports in the coming months will have much of an effect on the tanker market.

While the tanker market has avoided much of the malaise affecting the rest of the market as it capitalised on moving oil into storage, that freight opportunity now seems all but exhausted. Tankers operators may soon need to face up to the new reality of freight rates below breakeven, as so many of their bulk carrier brethren have already unhappily accepted.

Rallying for better rates

There is a growing backlash against such low freight rates and one that the tanker operators can hitch their wagon to. First International chief executive and chairman, Paul Slater is the latest to add his voice to the growing crowd of shipping specialists stating that ships simply cannot continue to trade at rates of income that do not cover all operating expenses, including maintenance, crew and insurance, and more.

In an editorial for Splash247, Mr Slater said: “The single voyage spot markets do not deal with these issues and owners who are trading their ships in these markets will become insolvent when the essential costs cannot be met. There are no simple solutions, except to recognize that shipping will always be a demand driven business, and the survivors will be the ones who manage their finances prudently and take their ships out of service when rates continue to not cover their costs.”

Indeed, the steep reduction in the demand for cargoes along with the doubling of the size of sectors of the world fleet can only be alleviated by the laying-up of a large number of ships, especially in the dry cargo and container sectors.

A bright spot

With tankers expected to weaken this year, joining other depressed sectors marred by weak freight rates and volatility, investors are rightfully cautious about how and where to spend their money in shipping.

But there’s still at least one bright spot, according to Adam Kent, director of Maritime Industries Int. Speaking at Marine Money, Mr Kent pinpointed chemical tankers as perhaps the best sector for consistent returns in the future.

He acknowledged that investment in crude tankers is now much riskier, suggesting that owners trade a tanker for a year, “flip it and turn it into dry bulk”. Mr Kent also predicted that the nightmare for dry bulk carrier operators would continue for at least the next two years, if not three, and that modern panamax ship values will continue to fall throughout that time. But, the silver lining in his playbook is that almost everything else will begin to rebound.