Strong markets – now also for product tankers
In our previous market update in early October, we described the upturn in the crude oil tanker segment. Rates in the VLCC segment had then moved up to $70,000 per day in a short time. In the following weeks, towards mid/late October, the upturn was further strengthened due to unpredictable events such as the drone attacks on refineries in Saudi Arabia and the imposition of sanctions on a Chinese shipping group. On some individual days, they were up to $200-300,000 per day. From these extremely high levels came a natural relapse – but from great heights. At the time of writing, the rates for a VLCC tanker are about $80-100,000 per day and for a suezmax tanker about $40-50,000 per day.
Stable upturn in the product tanker segment
We also stuck our neck out in the market update, saying that it was only a matter of time before the upturn also appeared in the product tanker segment – our main presence. And in the rear-view mirror we can say that we were absolutely right. Development may not have been quite as “hysterical” as in the crude oil tank segment, but from the low $5-10,000/day the market has moved to today’s more stable $+20,000/day – depending to some extent on global location and the ability to combine voyages.
Different break-even levels
We have been talking about income. To obtain an overall picture, costs also need to be looked at. For a VLCC tanker, break-even is normally about $30-35,000/day. The corresponding level for a Suezmax tanker is about $20-25,000/day and for a standard MR tanker about $15-17,000/day. Our P-MAX tankers are about $1-2,000 higher, as they are larger and can carry more cargo. These are the levels of earnings that the different types of vessels need in order to generate a surplus. With this in mind, it is easy to see that recent years have been really challenging for tanker shipping as a whole.
Delay effects and earnings
It is important to remember that it always takes a little time for changes in the market rates to be reflected in earnings. Contracts that have been entered into and voyages must be completed first. In tanker shipping, we are used to talking about “delay effects”. A voyage for an MR tanker can take up to 30-40 days, and up to 50-70 days for a large crude oil tanker. This means that before the old contracts have expired, the vessels will, during a fast market upturn, generate lower earnings than the most recently agreed freight rates. For example, the strong market upturn in the suezmax segment during Q4 2018 was not fully reflected in our financial statements until Q1 2019. Of course, in the event of a sharp decline, the reverse applies.
What of the future?
So, enough talk about developments up to today. How do we see the future? Our overall view is largely unchanged. We continue to expect a strong, stable market for the remainder of 2019 and during 2020. We are therefore at the beginning of the tanker market upturn we have so long expected. The drivers include strong structural causes in the form of high demand for oil, balanced stock levels and relatively few ship deliveries. In addition, there are a number of “wild cards” that may have a further effect. The main ones include consequences of IMO 2020.
Gothenburg, November 2019,
Kim Ullman, CEO