Q3 2018 Asia Shipping Outlook: Oversupply sinking dirty tankers; clean hit by newbuilding VLCCs

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The Asian dirty tankers market is expected to be subdued in the third quarter, despite plans of exporting countries to increase output, but the clean tankers may show modest signs of recovery as refineries in North Asia ramp up output after recent turnarounds.

In each of the last three years, around 50 or more VLCCs have been delivered into the global fleet, resulting in excess supply at a time when OPEC countries and Russia teamed up to cut supply. These exporting countries announced in June plans to gradually increase output, but its impact may show up on the tankers market only with a lag, shipping industry executives said.

The next new VLCC deliveries will be between 40 and 45, said Masood Baig, a director at Singapore-based Strait Shipbrokers.

“If these ships load clean products from Asia to Europe and West Africa in lots of 200,000 mt each, the inventories at destinations will fill up in no time,” Baig said. The LR and MR segments will see a sharp slump in demand due to excess supply of supertankers.

The order for VLCCs is at a two-year high and at a risk of overinvestment. Last year, the global tanker fleet grew by more than 4.5% while the growth witnessed by the VLCC segment was almost 7%.

“When a VLCC loads clean products in its first voyage, it sniffs out the demand equivalent to seven or eight MRs in East Asia and also the potential requirement of the same number of MRs in the West. It is a double negative for product tankers,” Richard Matthews, head of research at EA Gibson Shipbrokers said at the Enmore Oil Tanker Shipping Summit in Beijing last week.

It is not just VLCCs which are reeling under heavy supply. Genoa-based global shipping brokerage and consultancy, Banchero Costa, has recorded the delivery of 57 dirty tankers including Aframaxes, Suezmaxes and VLCCs in the first five months of this year.

This is only slightly less than last year, but its a meager consolation as deliveries in 2017 were at a six-year high, said Ralph Leszczynski, Banchero Costa’s Head of Research.

Fortunately demolition of aging ships has shown a significant rise, Leszczynski said.

Over January-May, 42 dirty tankers were scrapped, totaling 7.5 million dwt, up from just just four ships totaling 0.4 million dwt in the same period of 2017.

Lower earnings, a decline in tanker usage for floating storage and a rise in scrap prices have supported scrapping activity, EA Gibson’s Matthews said.

“Fleet growth is constrained by higher scrapping and delayed deliveries,” Matthews noted.

If the current trend continues, the net growth of the dirty tankers’ fleet this year will be 2% compared with 5.1% last year, Leszczynski added.

“The demand is uncertain, we have counted nearly a dozen cargoes loading from the US for China this month, but if the trade spat between the two countries exacerbates, this trade will come to a grinding halt,” a VLCC broker in Beijing said.

Plans of OPEC and Russia to increase output is not a game changer as it does not even offset all the production lost in Venezuela, Libya and US sanctions hit Iran, Leszczynski added.

CLEAN TANKERS IMPACTED BY NEWBUILDING VLCCs

In clean tankers, market participants are optimistic of a modest upswing in rates.

“Refineries have not set up large capacities for nothing. The third quarter is expected to be better,” a source with a clean oil tankers’ owner said.

As units return from turnarounds, they will step up production and exports from North Asia, pushing up demand for the ships though some of it is being eaten by newbuilt Suezmaxes and VLCCs, the source said.

In recent years, Latin America, Mexico and West Africa were driving demand for US clean products, but now greater refinery runs in Mexico and high floating storage of stocks off West Africa have hit trade flows, Matthews said.

In LRs, a slowdown in naphtha shipments on the Persian Gulf-Japan route on increased substitution with LPG may cap any gains made in the third quarter, while the performance of MRs will hinge on China’s export quotas for oil products.

source: Spglobal