Tim Smith, senior analyst at Maritime Strategies International, warns secondhand price erosion in the tanker market has some distance to go.
The lock gates holding back tanker secondhand prices have sprung a leak. In its latest quarterly report on oil tanker markets, MSI notes that the combined build-up of pressure relating to softening earnings and increasingly negative sentiment have finally taking their toll on tanker asset values.
At the same time, in the crude sectors at least, the average age of secondhand vessels sold has effectively doubled over the course of the last year, though a lack of liquidity is making price assessment more opaque.
MSI predicts that secondhand price erosion in the tanker market has some distance to go. Neither newbuilding prices nor earnings will offer support to prices over the next couple of years, with both reaching their nadir during 2018.
Based on MSI’s published monthly data VLCC five-year old prices remained static at $80m from September 2015 to January 2016 but have since dropped to $74m, the lowest level since Q3 2014. As a measure of how negative sentiment has become the one-yearear T/C rate was only $27,000/day in Q3 2014, whereas in May 2016 it remained at a healthy $40,000/day.
It should be noted that some of the downwards pressure on secondhand prices has been due to newbuilding prices, which have been having their own troubles finding a secure footing on a downwards slope. This dynamic reconfirms the requirement to look at all secondhand price drivers in the round and not just earnings in isolation.
The 0 year old resale values have, relatively speaking, held their value well over the course of 2016 when compared to most other tanker prices. However, the recent rumour that Metrostar Management has sold four of its VLCCs, scheduled for delivery from Hyundai Heavy Industries later this year and in 2017, for around $85 meach suggests that benchmark VLCC resale prices could collapse quickly if this deal ultimately concludes and becomes the new industry yard stick for last done.
At the other end of the age spectrum the recent upward momentum in scrap prices has offered some support to 20-year-old prices and has prevented the precipitous decline witnessed by the 15-year-old vessel prices. With the South Asian monsoon season currently in full swing this prop has momentarily fallen by the wayside as scrap prices have retreated once more. However, the continuation of the recently imposed Indian government restrictions on cheap steel imports (principally from China) will help pave the way for a recovery in steel scrap prices later in the year offering some solace to ageing vessel prices.
There is a noticeable disparity between crude and product tankers, in terms of price movements, with crude tankers the clear loser. Even within the crude and products subsectors price movements have been anything but uniform, although whichever way it’s sliced and diced aframax and suezmax tankers have come out as the clear losers, whereas the LR1 product tankers have been the relative winners, in an environment where all prices have declined.
The ‘strength’ in LR1 prices during 2016 is partially due to the weakness in LR1 prices in 2015. For example, both MR and aframax tanker five-year-old prices finished 2015 on a high whereas the equivalent peak for LR1s was witnessed during Q3 2015, so the erosion in LR1 prices had started before 2016 had begun.
Although the actual volumes of transactions have been largely comparable each quarter over the last year, what has been most noticeable has been the increase in the average age of the vessels transacted. Since Q2 2015 the average age of vessels involved in S&P transactions has increased significantly for all oil tanker sectors, bar the 10,000 to 70,000 dwt size band, which has remained relatively static at around 10 years old.
A lack of modern S&P transactions has made assessing the price of modern tonnage increasingly more difficult. This has meant that shipbroker-published prices for modern tanker tonnage have varied significantly over the course of 2016, for example, the spread on a 0 year old resale price for an aframax tanker has been as much as 10% ($50m versus $55m) between different brokers.
In these situations prices are ultimately pinned down based on a combination of market expectations (positioned between a willing seller and a willing buyer’s price expectations). When it comes to the willing buyer and willing seller price spread, where brokers ultimately end up (in terms of their published numbers) is partially dependent on whether they are typically acting for buyers or sellers and their propensity to conclude business – such is the nature of the beast.
In the case of MSI, values are also derived based on the levels of the known second-hand price drivers (earnings, newbuilding prices and scrap price). This additional quantitative element of analysis enables MSI to continue to make price assessments in low-liquidity markets.
The impact of deteriorating freight and newbuilding markets is evident in MSI’s forecast for asset values. For the smallest tankers, secondhand prices will settle in a 2017/18 trough at levels last witnessed during 2013, whereas their larger tanker brethren will come to rest at slightly higher relative levels but more firmly in 2018.
With tanker demand growth set to slow and supply side pressure building it is difficult to see much scope for an upside to MSI’s base case secondhand price forecast, especially one that would change the medium term direction of the outlook. The downwards movement in prices will be sufficient enough to catch out any unsuspecting industry participants that are still relying on mean reversion as a ‘forecasting’ methodology.
MSI’s five-year-old price forecast in 2018 for a VLCC is $63.1m, the annual average over the course of the last 10 years has been over $90m. You have to extend the average back over the last 32 years, encompassing the dark days of the early 1980s when VLCCs were going straight from shipyards to layup and then scrapped, to get an average that captures the forecast trough level.
Towards the end of the decade, secondhand prices will take an upwards trajectory as supply demand balances improve and shipyards ‘renormalise’ capacity and output based on a new contracting landscape. This will mean that by 2020 secondhand tanker prices will have recovered to around levels being witnessed today.