Suezmax operators search for upsides

The global Suezmax fleet comprised more than 500 vessels as of June. Credit: Southern Cross Maritime
The global Suezmax fleet comprised more than 500 vessels as of June. Credit: Southern Cross Maritime

Owners and operators of Suezmax tanker tonnage are hopeful that the market will see an improvement and a shift towards better balance by the end of 2018 after a period of oversupply and uncertain demand drove vessel earnings down sharply in the first half of this year.

There is optimism for subsequent years as the orderbook is limited and older tonnage is likely to be withdrawn as the IMO 2020 low-sulphur deadline approaches.

According to IHS Markit statistics, in June the Suezmax fleet consisted of 531 vessels in service, aggregating 83.5 million dwt. The average age of the fleet in service is nine years. The largest tranche of ships is in the 5- to 9-year-old age bracket, accounting for about one-third of the fleet. These figures exclude dedicated shuttle tankers.

A further 43 ships were on order, representing about 8% of the current fleet. So far 2018 has seen few new orders for Suezmax tonnage as owners and operators wait to see if their hopes for improved market balance arising from modest net fleet growth in the next couple of years are justified. The size of the Suezmax orderbook has fallen by more than 50% since mid-2016. With no sign of new orders picking up this year, and most of the current orderbook due to be delivered in the next 12 months, capacity on order seems set to decline further in 2019.

Of the current fleet, 117 ships are 15 years or older and therefore potential candidates for withdrawal as the 2020 deadline approaches, with many of them unlikely to be modified to use low-sulphur fuel or have scrubbers installed. Unless there is a surge of fresh orders in the next year or two, the Suezmax fleet is unlikely to see any significant net rise in aggregate capacity after this year, which points to a positive scenario for owners.

IHS Markit analysis shows that in the first half of 2018, there was a modest rise of 5.5% in loaded tonne-miles by Suezmaxes, compared with the first half of 2017, which had seen a much stronger double-digit increase from the first six months of 2016. In the first half of 2018, there was a related increase in voyage miles in ballast. This indicates a slight loss of productivity overall, with a drop in the percentage of time vessels spent under way and loaded in the early months of 2018 compared with 2017. This was largely due to emerging trends in oil supply and demand in relation to trades favoured for Suezmaxes.

This performance is reflected in the fact that in the first half of 2018, average speeds of loaded Suezmaxes declined from 11.3 kt to 10.8 kt and those in ballast dropped from 10 kt to just less than 9.5 kt compared with the same period in 2017.

These trends are consistent with the lower earnings achieved by Suezmaxes in the first half of 2018, which fell below USD20,000/day and into loss-making territory in many cases. Leading tanker owner and operator Frontline, which has a fleet of 16 Suezmaxes, estimates that the breakeven timecharter equivalent rate for its Suezmaxes in 2018 is USD18,200/day. By the end of June, Suezmax spot rates on the benchmark TD20 West Africa–UK/continent route had fallen close to just USD10,000/day timecharter equivalent. One-year timecharter rates had declined to USD16,000/day. This compares with the most recent peak, in late 2015, of more than USD35,000/day.

In the first half of 2018, while all crude tanker segments struggled, Suezmaxes fared the worst. This is partly attributed to a relatively low level of withdrawals and overall fleet capacity having expanded with no commensurate rise in demand. The pace of new deliveries will slow but continue to outpace vessel disposals so that the fate of the Suezmax sector in the immediate future will depend largely on what happens to demand, unless there is a significant increase in disposals of older tonnage. It will also be influenced on the comparative rates for very large crude carriers (VLCCs) and Aframaxes in trades where they compete.

There remains significant uncertainty regarding crude tanker market fundamentals with regard to some supply countries and the impact of macro-economic trends on global demand. The United States’ planned re-introduction of sanctions against Iran later this year would affect its crude oil exports, while escalating conflict in Libya is hampering crude output there. Venezuela’s ongoing political turmoil is hitting its crude output. All three countries are important sources of Suezmax cargoes.

On a more positive note, some other exporters, including Saudi Arabia, Nigeria, and Russia, are likely to increase their output, along with the United States, as the oil market moves closer to balance after a prolonged period of excess supply. Suezmaxes will pick up some of this business but the change in trading patterns will affect overall tonne-mile trends. Some Suezmaxes have been employed carrying clean cargoes such as gasoil from Asia to Atlantic destinations.

Earlier increased orders of newbuildings was at least partly because lower prices were offered by shipbuilders. However, this trendhas been reversed to some extent with newbuilding prices for Suezmaxes having risen in the 12 months to April 2018 from the low USD50 millions to the high USD50 millions, making owners pause in light of lower earnings and mounting market uncertainty. The value of modern secondhand Suezmax vessels could also increase when the current wave of newbuildings works through and disposals rise, but they remain well below the typical values of two years ago, with five-year-old ships currently valued at about USD43 million compared with values exceeding USD50 million in 2016.

Belgium-based Euronav recently grew its Suezmax fleet from 21–27 as a result of its merger with Gener8. It expressed cautious optimism that the poor performance of the Suezmax market in recent months is set to improve.

Brian Gallagher, head of investor relations at Euronav, told IHS Markit that the drop in the size of the Suezmax orderbook to a reasonable level is encouraging, with a tailing off in orders continuing so far into 2018. Global oil demand is also positive overall, although local factors are affecting some Suezmax loading areas.

“A positive driver is the upcoming IMO 2020 deadline for low-sulphur emissions, which is likely to see older tonnage being withdrawn. There are about 70 Suezmax tankers that are more than 17 years old. Overall, we expect the Suezmax market to move towards balance in the second half of 2018,” he said.

Gallagher commented that, despite Euronav’s merger, the Suezmax market remains fragmented, with about 100 owners in a market of just more than 500 vessels. “There is no sign of any major consolidation taking place. Euronav is always on the lookout for new opportunities but we have no firm plans at present,” he said.

This year Euronav is taking delivery of four new Suezmax tankers, which were acquired against seven-year contracts with oil company Valero, but it has no further Suezmax additions planned. “At present, we prefer to stay out of shipyards for Suezmaxes, and any vessel acquisitions will be on the basis of firm contracts,” he said.

In reporting Euronav’s 2017 results, the company’s chief executive officer (CEO), Paddy Rogers, said, “The key challenge for the tanker market remains the concentration of deliveries of newbuildings in both the VLCC and Suezmax sectors. If the illness is low freight rates, then the cure is low freight rates, as that should drive more ships to be removed from the active global fleet. Euronav notes an encouraging recent rise in recycling activity but it needs to be sustained before an inflection point in the cycle can be reached.”

Euronav is among the larger fleets in this segment. Other leading operators with similar-sized fleets include Nordic American Tankers with 28 vessels, plus a further three newbuildings on order, the first of which, Nordic Aquarius, was delivered in early July, Teekay with 33, and Dynacom Tankers Management with 29.

Suezmax pools include the Heidmar-operated Blue Fin Tankers Pool with 22 ships, Stena Sonangol Suezmax Pool with 21 vessels, and the Navig8 Suez8 Pool with 15 ships. Chinese owner COSCO has recently ordered three ships. COSCO is a member of the Blue Fin Tankers Pool, together with Greek owner Liquimar, Ridgebury Tankers, and International Seaways in the United States, and German owners Ernst Jacob and investment fund Salamon. In April, Heidmar added the 2016-built Suezmax RS Tara to the Blue Fin Pool, bringing its fleet up to 23 vessels.

There are no Suezmax operators with capacity amounting to more than 6% of the total fleet and there are many owners and operators with small numbers of Suezmax vessels among larger diversified fleets, illustrating how fragmented this market remains.

Another leading owner and operator, Frontline, was less optimistic about an immediate recovery in Suezmax rates. CEO Robert Hvide Macleod said, “While there are encouraging signs that seaborne crude volumes may soon increase as a result of changes by OPEC and a slowing trend of inventory draws, the market is not yet factoring in upside potential,” he said.

According to analysis by DVB Bank, the second half of 2018 should be better than the first half, but it suggested that recovery in crude oil tanker earnings will be gradual over the next 12–18 months.

All this points to Suezmax owners, while having some grounds for optimism that the market should improve from its recent lows and a brighter future, will probably have to be patient for a bit longer before they see any firmly positive results.