Tanker Earnings to Remain Low in 2018 amid Oversupply

The recovery of the tanker market forecast to start next year and give the much-needed boost to company earnings seems to be far-off due to the lingering effect of tonnage oversupply.

According to Fitch Ratings, a glut of new vessel deliveries and limited scrapping of older ships means the global tanker market will remain oversupplied in the near term, keeping freight rates low and shipping company credit metrics under pressure in 2018.

The rating agency expects capacity to have increased by 5%-6% by end-2017 from a year earlier.

“We forecast capacity to rise a further 4% in 2018. This reflects orders placed in 2015 when tanker rates were high, with a large share of orders coming from Greece and China,” Fitch Ratings said.

Vessel scrapping has increased slightly, helped by higher steel prices. But only five very large crude carrier (VLCC) class tankers were scrapped in the first seven months of this year, while 36 new VLCCs were delivered in roughly the same period.

As pointed out, demand growth will probably trough in 2017 due to high global oil inventories and OPEC production cuts.

“We expect rising global oil consumption, higher US exports and gradually moderating oil inventories to drive a moderate increase in tanker demand in 2018. Demand could, therefore, rise by about 4%, potentially matching supply growth,” the agency added.

This should halt the market’s deterioration, but tanker rates are unlikely to receive a significant boost without further vessel scrappage or slower capacity growth, Fitch explained.

As a consequence, Fitch expects tanker rates to remain at current low levels throughout 2018 though they should avoid the sharp falls of the last two years. Rates for Suezmax vessels dropped by 39% in the first 10 months of 2017 following a 52% decline in 2016.

“This will keep credit metrics at shipping companies under pressure in the year ahead, although liquidity risks are limited due to generally healthy cash positions that are further enhanced by credit facilities. Companies with a large share of long-term contracts, such as Soechi and Sovcomflot, should be able to maintain relatively healthy operating profits, while those with few long-term contracts are likely to break even at best,” the agency concluded.

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