Crude tankers: Hope of bottoming out

THE million-dollar question for the crude tanker industry, quite literally, is whether earnings will start to recover next year. 

Many market participants expect the current market trough to be a shallow one. Based on this, rates will have hit bottom in 2017.

Indeed, going by the average forecast earnings in our annual survey, all crude tanker segments will enjoy a recovery in spot earnings in 2018. Daily earnings of very large crude carriers are expected to rise to $26,240 from $24,048, those of suezmaxes to $19,012 from $15,968, and aframaxes to $15,648 from $13,182.

There are of course some factors supporting such bullish arguments, such as the continued increases in US oil exports, recovering Nigerian and Libyan production and China's unabated thirst for energy.

Yet the recovery could be easily derailed, not least because of the still large orderbook. The Organisation of the Petroleum Exporting Countries looks set to extend its supply cut deal well into 2018, while geopolitical risks in Iraq and Venezuela could create disruptions to tanker trades. Those are perhaps why the forecast gains in next year's earnings remain moderate.

Opportunities

US exports: The world’s third-largest crude oil producer has been growing its overseas sales since the 40-year-old ban on exports was lifted in late-2015. Seaborne crude exports are at record high levels and have occasionally breached the 1m barrels per day mark this year, data from Lloyd’s List Intelligence shows.

Riding on the shale revolution, US crude production will average an all-time high of 9.9m bpd in 2018, the Energy Information Administration has predicted. This points to further increases in exports.

So far, the rise in US exports has benefited all segments, with suezmaxes carrying nearly 30% of the barrels while VLCCs and aframaxes split the rest. It has also brought reverse lightering business to owners like Teekay Tankers and AET.

As the US Gulf terminals, including Louisiana Offshore Oil Port, plan to continue expanding export capacity, larger-sized tankers engaged in longhaul trades will be better positioned to take advantage of future increases in exports. Tonne-miles could be boosted further even as lightering opportunities may fall.

Chinese imports: The rise of the world’s top crude buyer shows no sign of slowing, with healthy domestic fuel demand, increased intake from privately owned teapot refineries and ongoing requirements from strategic petroleum reserves.

While there has been talk of slowing strategic purchases, China’s refining capacity expansion, which Clarksons estimates at 800,000 barrels per day next year, will likely continue to support the country’s import volume.

Seaborne crude imports to China will grow by a healthy 8% to 424m tonnes next year, according to the brokerage’s forecast.

Nigerian and Libyan production: The two Opec members exempted from the supply cut have been raising crude production and overseas sales throughout the year, as domestic conflicts largely abate.

According to Opec secondary sources, Nigeria’s production rose to 1.8m bpd in September compared with 1.5m bpd in the first quarter. Libyan output hit 923,000 bpd in the same month, compared with the first quarter average of 656,000 bpd. Lloyd's List Intelligence data showed similar growth trajectories in export volumes.

Full-year exports of the two countries are likely to be higher next year than this, as long as their domestic situations remain relatively stable. However, with a lack of upstream maintenance and investment, the International Energy Agency has put Nigeria’s production ceiling at around 1.8m bpd and Libya’s at 900,000 bpd-1m bpd — far below their heyday earlier this century.

Threats

Oversupply: The supply overhang is unlikely to ease in the coming quarters, as scrapping volumes, while picking up, are insufficient to offset newbuilding deliveries.

Clarksons data shows 46 VLCCs, 35 suezmaxes and 63 aframaxes are due for 2018 delivery, which will keep fleet growth high.

More owners are willing to bet on an early market recovery, potentially leading to a paradoxical development. A total of $6.3bn was spent on crude tanker orders in the first nine months of this year, already exceeding the $3.2bn spent over the whole of 2016. If this trend continues, oversupply will persist longer than expected. 

Opec cut: Cited by many analysts as one of the largest bearish factors affecting the market, Opec’s 15-month supply cut agreement with some Russian-led producers, which is due to end next March, looks likely to stay in place.  

In recent weeks, Russian president Vladimir Putin and Saudi Arabian crown prince Mohammad bin Salman both openly suggested the 1.8m bpd reduction could be extended well into next year. Based on their track records, they tend to get what they want.

As Opec relies on Saudi Arabia’s reduction to achieve conformity, the supply cut has disproportionately hurt the Middle East VLCC market, even as its impact on tonne-miles is mitigated by rising Atlantic supplies to Asia. 

According to Lloyd's List Intelligence, Saudi Arabia’s oil exports amounted to 6.9m bpd in January-October, down 5.3% on the year.

Venezuela: Despite sitting on the world’s largest oil reserves, the South American country has faced falling production and exports after years of insufficient upstream investment and amid a domestic crisis.

Crude exports from Venezuela fell to 1.7m bpd in January-October, from 2m bpd in the same period of 2016. Fortunately for owners, the impact of falling exports on tonne-miles for now is largely neutral, as the country raises exports to China and India while cutting supply to the US.

There have been lingering fears that Petróleos de Venezuela could default on its bond payments, especially as the state oil company is banned by Washington from issuing new securities in the US. Also, domestic opposition to the regime of president Nicolas Maduro is growing.

Though the likelihood of a collapse of exports is low, it is possible, according to analysts. Such an eventuality could create huge short-term disruptions, though the Middle East could eventually offer replacement barrels to Asia and the US.

News:

The onus of shipping decarbonisation is on regulators, Maersk warns

REGULATION is needed to put meaningful momentum behind the development of zero carbon technology because individual company action and efficiency-based measures will soon have reached the limit of what they can achieve, according to the world’s biggest containership owner.

Speaking to Lloyd’s List during a Shipping 1.5 Ambition event during the UN Framework Convention on Climate Change in Bonn, John Kornerup Bang, head of sustainability strategy and shared value at Maersk, said policymakers needed to provide the shipping industry with a credible decarbonisation roadmap to create certainty for investments in this area.

Mr Kornerup Bang said shipping needed clear regulation and greater collaboration between private and public entities to drive innovation that will lead to new propulsion technologies for the industry’s move toward decarbonisation.

In a separate interview, Gunnar Stiesch, senior vice-president for MAN Diesel & Turbo, agreed that harmonised global regulation was a prerequisite for shipping’s decarbonisation. Uniform rules would create a level playing field.

Full story

IMO climate strategy must be in line with 1.5°C temperature rise limit

Adopting IMO’s initial strategy is critical, but it must be an ambitious one, writes Marshall Islands president Hilda C Heine fresh from the Bonn climate talks last week. “We strongly urge all IMO countries to use the months between now and April 2018 to work hard to make progress towards consensus on all issues.

Let me reiterate — adopting the IMO’s initial strategy is critical, but it must be an ambitious strategy that is consistent with the 1.5°C limit. We will not accept anything less as an outcome,” President Heine writes in Lloyd’s List.

Crunch time for ballast water treatment

It’s time to get real about ballast water treatment. So far, about 6,000 systems have been sold by 60 manufacturers. The vast majority of these systems have been delivered by the dozen or so majors.

However, it has been estimated by DNV GL that some 47% of the systems currently on board do not work. Many of the fitted systems have been upgraded or redesigned since they were installed, and probably all the crews given training in how they operate have been moved on to different ships, with different systems.

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Bain Capital is set to take over Giuseppe Bottiglieri Shipping

ITALIAN family-run bulker and tanker company Giuseppe Bottiglieri Shipping is set to be taken over by private equity firm Bain Capital pending a creditors’ vote on a new restructuring plan.

A source close to the matter said that while the €118m ($138m) capital injection by Bain would lead to full ownership of the company, Giuseppe Bottiglieri’s management team will be retained to oversee operations.

The funds will be used to pay off some of the debts, the source said on condition of anonymity, adding that the new plan does not include a sale of the company’s vessels.

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Why J Lauritzen is focusing on handysize bulkers and exiting supramaxes

FOLLOWING a strategic review, Danish shipping company J Lauritzen will be focusing its efforts on the handysize bulker segment and moving away from supramaxes.

The company currently owns ten handies and has eight supramaxes on long-term time charters. According to chief executive Mads Zacho the company will keep the supramaxes until the charters expire, but after that they will not be pursuing business in that sector.  
“We will focus resources on [handymaxes] because it has, for us, been more profitable, and plays into our strengths,” said Mr Zacho. “Man hours and money spent will be redirected to the handysize segment rather than spread ourselves thin,” he said in an interview, adding that it will continue to keep some exposure to the supramax sector through its long-term charters. “We are heading for a range where dry bulk can run at reasonably profitable levels.”

A Lloyd’s List survey revealed that average handysize earnings in 2017 will reach $7,686 per dayversus $5,245 per day last year as a result of an increase in minor bulk trades, although the gains lag behind other bulker segments.

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Rates have plummeted on key East-West box trades, far below 2016 levels

WITH lines steadfastly refusing to remove capacity on major East-West box trades, spot freight rates on the transpacific and Asia-Europe trades slumped further this week and are now 22%-26% lower than a year earlier.

The World Container Index assessed by Drewry, a composite of container freight rates on eight major routes to and from the US, Europe and Asia, plummeted 10.5% this week and is now down to $1,493 per 40ft container — 16.2% down compared with the same period of 2016 and $113 lower than the five-year average of $1,606 per 40ft container.

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Opinion:

Time is money for Angeliki Frangou

IF TIME is money, then buying time might cost you a little extra. This must be the feeling on Akti Miaouli after Navios Maritime Holdings, the parent company in Navios Group, refinanced a $300m bond at 11.25%.

It may have cost her dear, but Angeliki Frangou knows what she is doing.

The new bonds will replace the current ones that were scheduled to mature in April 2019 and paid an interest of 8.125%.

Ms Frangou essentially bought three-and-a-half years (the new bonds mature in August 2022) by paying an extra 3.125%. That is not chump change any way you want to spin it.

But let us please bury the talk about Navios going belly up when the original bonds expired. We guess that party just got cancelled.

Yet why the rush to do it now? Aren’t dry bulk markets poised for a rebound in 2018? Word on the street is that a prudent company will never wait until a liability becomes “current” to refinance it.

“Current” means there is 12 months or less until maturity. That is when Navios would have to reclassify its bond as a current liability in the books.

That sounds right but let us talk about the elephant in the room, the additional 3.125% or $9.5m in annual interest cost.
That has got to hurt.

We need to go back to the go-go days of junk bonds in the late 1990s for these types of yields. Coincidentally that was when Good Faith Shipping, a company run by Ms Frangou’s late father Nikolaos Frangos, famously pulled out of deal offered at 10.5%.

The only silver lining is that the new bond can be immediately called. In layman’s terms, that means Navios can refinance it at any time between now and 2022.

This is an unusual feature that works to the advantage of Navios and kudos to Ms Frangou for arranging it.

As we said, time is money and five years buys you a lot of time to get it right, next time.

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Analysis

Global Ports Holding poised for worldwide expansion

WHAT is the potential of a business that on the one hand is dependent on shipping, national and local governments and tourism, and on the other has hundreds of investment targets to choose from?

“In our business you can never be too definitive about what you want to do next because it is really business development with governments, according to the will of the government and local authorities. So you do not know how fast or when an opportunity is going to come,” Global Ports Holding chief executive Emre Sayin told Lloyd's List in an interview.

With the inauguration of the company’s new Lisbon terminal that attracted senior Portuguese governmental officials, local authorities and representatives from the cruise industry though, it is clear that GPH has set its sights on global expansion.

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