VLCCs, Suezmaxes and MR Product Tankers to Face the Most Pressure from Tonnage Oversupply

Source:Hellenic Shipping News Worldwide
2012.11.13
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Tonnage oversupply is one of the major reasons for concern among the tanker ship owning community, a problem steming from the confidence among owners on the back of robust tanker rates back in 2008. This led them to order a huge number of tanker vessels, which are been delivered gradually, while the additional negative factor was the falling of oil demand growth and amid a weak economic outlook. But, according to the latest report from US-based consultant, Mcquilling Services, "a breath of fresh air for owners however, has been the slower than expected deliveries this year. The year-to-date slippage rate is about 20%, much higher than the traditional level of around 5%. This has been influenced by ship owners employing a variety of measures to delay deliveries. Tactics include outright cancelations, foregoing options, taking delivery of a different vessel class or inspection delays" said Mcquilling.
It added that "the impact of these actions is evident. At this point in the year we would have anticipated that about 80% or 190 ships of our 228 would have delivered from yards. However, through October this number was 151 tankers. Additional support to the fleet balance has come from an elevated deletion profile. Year-to-date we would have expected that 55 of our forecast 66 vessels would have been demolished but this number currently stands at 64. Furthermore, over the last two weeks, our proprietary data showed that three additional VLCCs had been sold to Pakistani breakers for demolition as market conditions weigh on owners.
Despite these seemingly positive developments regarding the balance of the trading fleet, it appears that the oversupply is similar to a stubborn houseguest that shows no signs of packing their bags. In preparation for our Tanker Market Outlook 2013-2017 we have started to examine how the orderbook will develop in 2013 and 2014, as these years have the greatest influence on short term tanker rates. To do this exercise, we examine the delivery schedules of tankers in our proprietary database for 2013 and 2014 and compare it to our January assessmen. At this point of the year, we are not assessing the financial health of shipyards or owners, which will account for some vessels being delayed. We are also not assigning the classifications for clean product tankers. Historically, about 2% of LR2 and LR1 are classified under the IMO 1 or 2 categories while for MR2 and MR1 vessels these numbers are 30% and 50% respectively" said the company's report.
Still, tanker owners have been allowed some respite in 2012 from previous year’s orders as the delivery profile has been slower than anticipated. While this may have provided some support this year, a negative consequence is that barring any massive shift in the rate of scrapping, these tankers will simply hit the water at a later date, further boosting tonnage supply. The lion’s share of these deliveries in the cases of January 2012 and November 2012 were expected in 2013 and experience tells us that all of them will not transpire, spreading previous year’s orders throughout the forecast period. This is particularly true for the earlier years in the forecast period.
"When comparing these initial forecasts to the averages of previous years it appears that the VLCC, Suezmax and MR2 tanker classes will potentially feel the most pressure. Given their dominance in sea born trade this development was predictable. In January’s Tanker Market Outlook we cautioned that the MR2 market was starting to look susceptible to a supply imbalance during the forecast period. This situation is looking increasing likely to transpire. Throughout the first 10 months of the year 77 MR2 tanker orders have been placed, with no IMO classification having yet been assigned. While these vessels are unlikely to hit the water until the latter half of the next forecast cycle, or perhaps even later, it will be compounded by the already high delivery expectations for 2013 and 2014. In our January 2012 estimate for 2013 and 2014 MR2 deliveries were already 65, but given the very low yard deliveries recorded so far this year the delivery profile has increased by as much as 50% in our November estimate" Mcquilling Services noted.
It concluded its analysis by saying that "when examining tanker contracting though end-October 2012 it appears that ordering activity has returned to more traditional levels. The majority of tanker classes have single digit orders, with the exception of the previously mentioned MR2 activity. The low contracting volumes come as little surprise given the state of the tanker market and difficulty most owners face securing financing. These reduced contracts combined with the expectation that fleets will consolidate due to market pressure, should help balance the tanker market over time. Barring any major shift in global economic growth or oil demand, tanker owners are going to continue feeling the pressure from the robust ordering activity of previous years. While the reduced rate of deliveries, combined with elevated scrapping has likely provided some support to owners’ bottom lines this year, fundamentals will remain pressured in the short term".

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