Will this be the year the product-tanker sector finally solves its ‘Godot’ problem? In Samuel Beckett’s Waiting for Godot, two companions spend both acts of the play waiting for a character who never arrives. Product-tanker owners and investors have been playing a similarly maddening waiting game as they anticipate a rate recovery that is always just around the corner.
In late 2017, frustration was clearly evident in analysts’ commentaries. “How long will it take for this stinking product-tanker theme to work?” asked Stifel analyst Ben Nolan. “The wait is frustrating – and seemingly endless,” said Evercore ISI analyst Jonathan Chappell, who conceded that he has written “ad nauseam” about a recovery and likened past upturn predictions to “the boy who cried ‘wolf’”.
Despite this backdrop of discouraged cynicism, investor sentiment towards products tankers in 2018 is probably more positive than towards any other shipping sector. There is a strong belief that the market will finally turn, given the favourable supply-demand balance.
IHS Markit’s Maritime & Trade (M&T) division predicts that the global product tanker fleet will grow by only 2.8% this year, with 6.1 million dwt of newbuilding additions countered by 1.6 million dwt of scrapping. This compares with a 3.7% fleet growth last year and a 5% expansion in 2016. Vessels in the Panamax/LR1 category are predicted to see net growth of 2.7% in 2018 (down from 5% last year), with the large medium-range (MR) tanker fleet to rise by 3.2% (down from 3.5% in 2017), small MRs to increase by 0.7% (versus 2.5% last year), and Handymaxes by 3.7% (down from 4% in 2017).
At the end of 2017, the product-tanker orderbook stood at about 12% of the on-the-water fleet, with the Panamax/LR1 orderbook at about 16% of existing capacity, according to IHS Markit M&T. Roughly 15% of product tankers in operation were older than 15 years, but average age varied greatly by sector: 12% of MRs were older than 15 years, but only 8.5% of LR1s.
Demand trends also appeared positive, given falling inventories. In 2016–17, high levels of refined-product inventories around the globe curbed arbitrage opportunities, which are an important driver of product-tanker demand. Those inventories have now wound down.
In September–October 2017, US distillate stocks fell below the five-year average for the first time since March 2015, according to the Energy Information Administration. OECD products stocks fell 6% between January and October 2017, when they flirted with the five-year average, according to the International Energy Agency.
“Our hope is that the normalisation of product inventories sets the stage for a good year in 2018,” said JP Morgan analyst Noah Parquette. According to Chappell, “The normalisation of global refined-product inventories drives intra-region arbitrage trading opportunities.”
Beyond inventories, two indicators to watch this year are US exports and global refinery developments.
At the end of November 2017, US products exports reached an all-time record of just over 5.9 million barrels/day (bpd). Average products exports in January–November 2017 averaged 5.1 million bpd, up 500,000 bpd or 11% year on year (y/y). On a positive note for tonne-mile demand, US exports are increasingly flowing on the long-haul route to Asia. In the first nine months of last year, US products exports to Japan averaged 300,000 bpd (+26% y/y), with 209,000 bpd (+17%) to China, 165,000 bpd (+9%) to India, 129,000 bpd (+32%) to South Korea, and 181,000 bpd (+49%) to Singapore.
On the refinery front, the key issues for product-tanker players are the scope of capacity coming onstream and where the facilities are located. If a refinery is built close to a crude source but distant from end-consumers, it is good for product tankers and bad for crude tankers. If a refinery is built adjacent to end-users but distant from the crude source, it is positive for crude tankers and negative for product tankers.
The competitiveness of a refinery’s feedstock dictates the exports volume. As Evercore ISI refining analyst Doug Terreson explained in a recent sector report, “Refined products flow freely between regions because of the regional mismatch between refined product demand and supply. Imports and exports are the balancing mechanism. Low-cost manufacturers dominate global export markets for refined products. The reason: they can deliver refined products below manufacturing costs in many importing markets, even after paying transportation costs.”
Terreson estimated that new global refining capacity totalled about 415,000 bpd last year (135,000 bpd in China, 120,000 bpd in Russia, and 160,000 bpd in the Middle East), while refinery closures took 341,000 bpd offline, equating to a net gain of 74,000 bpd.
This year, Evercore ISI believes new capacity will total 820,000 bpd, with refineries coming onstream in China (two facilities totalling 270,000 bpd), Iran (155,000 bpd), India (85,000 bpd), Turkey (80,000 bpd), Saudi Arabia (80,000 bpd), Egypt (60,000 bpd), Russia (45,000 bpd), and Kazakhstan (45,000 bpd). Refinery closures in 2018 are expected to remove 276,000 bpd in capacity, equating to a net gain for the year of 544,000 bpd – more than seven times last year’s increase.
As Chappell emphasised, with “new capacity additions for global refineries set to double in 2018 versus 2017 and increase again in 2019”, this is “positive for global volumes” and “positive for product tanker demand”.
Access the 2018 outlook page