Can tanker markets re-write the containership boom and bust playbook?

Resisting a new building tidal wave is key to maintaining market health against a cloudy outlook, writes Tim Smith, Director, Maritime Strategies International.

Tanker markets moved lower in Q2 2023, a moderation in revenue conditions consistent with MSI’s expectations and a consistent feature of our outlook.

Market developments for crude oil and product tankers in April and May saw a continuation of the overall trend from the highs witnessed in Q4 22.

For the April-May period, area income decreased by about a third against Q4 22 in the main tanker segments. It’s a big leak but by no means catastrophic. Because of the high income achieved, there is a significant cushion. Markets have fallen sharply, but where do they go from here?

As described in the MSI Q2 tanker market report, what these developments show is that markets remain volatile. The conditions on the demand side are built on a chaotic restructuring of the world oil trade, while trading volumes are cut by OPEC+.

Uncertainty also plays a key role in supporting income. As we explained in late 2022, we believe the market fundamentals are good, but not necessarily good. In another way, the market is ahead of where it should be based on supply and demand factors, and a reason for disruption is cooked in high rates, which reflects the turmoil seen in the oil sector.

The situation found in the containership market in 2020 is similar, in some ways, to the current scenario of the tanker market. Three years ago the global economy and supply chains saw major disruptions due to COVID-19.

This is accompanied by a rapid change in consumer spending that increases the demand for container cargo. As such, the containership markets are impressively fast and have reached unprecedented levels. Given the circumstances, these types of exponential income conditions can develop in any shipping market.

In fact, shipping history is replete with such examples. For participants it is easy to think that a new era has begun, and mistake disruption for strong growth.

When this collective belief in a vision of unstoppable growth reaches a critical mass, the next stage of a ‘classic’ boom-bust cycle in shipping is oversupply. -order new ships.

This is where the comparisons between the containership market and the tanker market diverge, but are not necessarily disconnected. A large order of containerships accompanied the sky-high cargo markets, forming a huge wave of deliveries. Again, in the time honored, these deliveries come just as demand conditions disappear, leading the market to crash as much as it rises. The effect of such ordering is to fill the shipyards, increasing the prices of new construction in all sectors, including tankers.

High shipbuilding prices and yard congestion have also been a key factor holding back tanker orders, meaning the sector is better protected from any supply risks than any other. time in its history.

The refusal to order is compounded by the uncertainty of future fuels and the wider energy transition leading to the use of oil.

Despite the recent order intake in the first half of 2023, in pure deadweight terms, the market is likely to see a contraction close to the five-year average, which includes very low orders in 2022. As shown in the chart, that is a remarkable difference in containerships that saw ordering jump almost sixfold between 2019 and 2021. The downside of this surge for containerships is now done, but for of tankers, even if the level of contracting increases, they will not be able to match such an over-optimistic level.

This element of ‘protection’ is critical to our tanker market forecast. We do not expect the growth in demand to continue in the longer term at the rates we saw in 2022 and 2023. We are consistent in expecting some moderation in the markets throughout 2023, which is starting to take shape. This is probably the best known of the timecharter rates.

Due to the volatility and noise of spot prices, they can be a difficult indicator to correctly gauge market direction. Time rates provide perhaps a more useful measure of underlying sentiment and fundamentals, given the commitment required from both parties to secure longer-term deals.

The curb on deliveries remains in place despite the reported reactivation of a large amount of new construction capacity over the past year or so. The truth is that most of this revival is in the planning or scaling up stage and will not contribute meaningfully to the output in the near future. This contrasts with ongoing reports of labor shortages at Korean yards and a clear capacity cap in Japan.

The net effect of this is to extend the delivery of the currently bloated orderbooks for LNG and containerships, which in the process will keep newbuilding prices higher as available berths are pushed into the future. The confluence of these factors led us to raise our expectations for prices above the levels seen in our recent forecasts. This should be good news for shipyards, although it should be noted that profitability remains elusive in 2023.

For the tanker sector, this is another factor holding back supply growth in the coming years. When combined with the future obsolescence of the fleet – which despite the current prevalence of old tonnage will be even more important – the sector is well protected from any weakness on the demand side.