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Commodities 2021: Clean tanker owners weigh options, face extended doldrums


Freight to remain under pressure through H1 2021

Product overhang, tonnage oversupply depresses market

Consolidation, tanker sales could provide owners reprieve

Houston — As the coronavirus pandemic continues to stifle petroleum product demand globally, the clean tanker market looks to be in store for an extended period of breakeven if not negative tanker earnings as far out as the second quarter of 2021, according to market participants.

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Petroleum product demand is projected to make a slow recovery in 2021, estimated to increase by 6.3 million b/d in 2021 after having fallen by an expected 8.7 million b/d in 2020, according to S&P Global Platts Analytics. The International Energy Association projected global energy demand would not reach pre-crisis levels until 2023.

Low refinery utilization rates and product demand have kept freight for clean tankers in the Americas depressed mid-June. Market participants have said that most US Gulf Coast-loading routes received daily earnings barely covering operating expenses and even into the negatives in November.

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Tanker rates could remain subdued through the first half of 2021 due to tonnage oversupply, Erik Broekhuizen, Head of Tanker Research and Consulting at Poten & Partners, said in the company's Oil Tanker Market webinar Dec. 8.

"We are in a rate environment that is very challenging. We'll need to see oil demand recover and all the overhang of tonnage from floating storage to be restored," Broekhuizen said.

Most shipowners and brokers expected that clean freight would return slowly alongside demand in 2021, with product stocks high in the US and Europe and refineries having cut runs for much of 2020. US Gulf Coast refinery utilization rates dropped dramatically in 2020, with Q2 rates averaging 19% lower on the year, Q3 average rates 18% lower, and Q4 rates 16% lower as of Dec. 16, according to Energy Information Administration data.

The clean tanker freight forward agreement market supports a slower outlook for freight to return to pre-pandemic levels, according to market participants. From February 2021 through July, Platts Analytics projected freight on the Medium Range USGC-UK Continent route to hover around $15-$16/mt, before dropping off to $13.75/mt and $13.63/mt in August and September, respectively.

Fleet consolidation and pooling

With freight projected to remain weak through much of 2021, shipowner companies have employed various methods to balance capital in the face of reduced earnings.

Fleet consolidation was much discussed following the inclusion of 28 Medium Range tankers from Diamond S Shipping's pool into Norient Product Pool on June 16.

Robert Bugbee, President and CEO of Scorpio Tankers, said during the October Capital Link Maritime Forum that consolidation and pooling would shift the supply side as the global product tanker fleet ages considerably. According to Scorpio Tankers' September company presentation, the average age of the active MR tanker fleet is 10.4 years.

Benefits from the global fleet's advanced age are likely to come into effect in the long term; though newbuild ordering stands at the lowest levels in multiple years, clean tankers over 15 years of age have been slow to leave the market. The pandemic set stringent restrictions at scrapping and recycling facilities, driving the tanker demolition rate down to almost zero ships in 2020.

Tanker sales offer immediate cash

Selling tankers, either to generate cash from older models or to lease back ships into the pool, provides a more immediate option for owners to retain capital.

Cashing in on older tankers also prepares owners for impending technological advancements and environmental regulations as the European Commission and the International Maritime Organization discuss the path to zero CO2 emissions by 2050.

d'Amico International Shipping executed the sale of three 2005-built MRs in July and September, which brought the fleet's age down to 6.95 years. The sales generated net cash of approximately $25.2 million, according to company press releases.

Shipowners with younger fleets still have the option to sell tankers and lease or charter the ships back into the operating pool.

On December 8, Maersk Tankers announced the sale of 14 tankers to China Development Bank Financial Leasing for $422 million, with nine of the ships to be bareboat chartered back to Maersk tankers and all 14 ships to remain under the management of Maersk Tankers.

Shipping market participants said the sale and leaseback strategy could give owners a reprieve during an extended period of low earnings.

"In this market, it's a stroke of genius. You get cash so you can have liquidity and still do a profit-share," one shipbroker said.

However, buyers could potentially be difficult to find, with global economies weakened under the weight of the pandemic. A shipowner said that the market had expected more sales and demolitions in 2020, and that many owners could lose money with few investors around to provide support for sale leaseback strategies.