Gibson: Surge in VLCC Orders amid Attractive Prices

Illustration; Image Courtesy: Euronav

Attractive newbuilding prices have pushed the order count for very large crude carriers (VLCC) to around 30 so far this year, which is more than double when compared to last year’s 13 orders for the entire year.

What is more, a number of owners, not just VLCC owners, are considering investment in new tonnage and are actively talking to shipyards, Gibson Shipbrokers said in its latest weekly tanker market report.

However, as disclosed, ordering activity in other tanker categories remains restricted, although some modest gains have been observed in the Aframax and LR2 sectors.

Ship values dropped on the back of last year’s turmoil in the shipbuilding industry, which has been hit by a prolonged period of low ordering activity in a number of shipping sectors, including tankers. The plunge in ordering appetite has resulted in restructuring and consolidation across the board, with some shipbuilders, such as STX shipbuilding, even resorting to court led restructuring.

As a result, this year tanker newbuild values reached their lowest levels since late 2003/early 2004, Gibson added.

However, the latest wave of new tanker orders has occurred against deteriorating trading conditions. Namely, spot earnings in the product tanker market have been very weak for quite some time, frequently falling to or even below the level of fixed operating expenses. The crude tanker market has fared better, VLCCs in particular; yet, even here earnings so far this year have been notably lower relative to 2016. While returns in the market are being pressured, the orderbook is still far from being modest, the report reads.

Apart from low price levels, ordering a new tanker now offers an additional benefit – delayed delivery due to a lengthy construction period, which will enable the owner to take control of the asset once the current phase of rapid fleet growth is over and/or is approaching its end.

Furthermore, as explained by Gibson, owners making a decision to order will have the flexibility to have their tonnage prepared in a most efficient and practical way for the approaching key legislation: the Ballast Water Treatment Management convention, which will come into force in September this year and the 0.5% global sulphur cap for marine fuels, effective January 2020.

“There is clearly some sound logic behind ordering a tanker now, which suggests that firmer interest in newbuild tonnage is unlikely to disappear anytime soon. However, access to new finance remains at highly restricted levels, while it is more challenging to advocate the case for new investment while returns in the industry are weak and/or are deteriorating. As such, only those with strong financial muscle are likely be in a position to capitalise on the current set of circumstances,” the shipbroker concluded.

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