Instead of running through news stories and anecdotes regarding travel and leisure green shoots, or lack thereof, let’s get right down to hard data.
We will get to cargo mile demand in just a bit, as that is the most important metric, however at this point I think looking at spot market fixtures will provide a particularly important snapshot regarding just how much demand is still missing from the equation. Since these can vary quite a bit by season and region, we’re going to be combining annual totals and averaging out by month to get the big picture.
Larger vessels typically are the most volatile when it comes to both chartering and rates from a TCE and spot market basis. There are numerous reasons for this but the short explanation that should suffice for this point is that larger vessels are assigned longer routes which involve higher risk and higher uncertainty. But this also correctly implies that they would be the most accurate gauge of larger and broader economic activity.
Therefore, it’s noteworthy that even if average monthly spot fixtures increased by 50% from current 2021’s numbers, it would still fail to reach 2019’s levels. This lack of activity is no small chore to overcome for late 2021, in fact it’s likely an impossibility.
Looking at cargo mile demand we see this volatility play out again in the larger VLCC class as they are down nearly 9% compared to last year at this time.
Now, in the above chart, take note of how the fleet continues to grow, up approximately 16% from 2018, while cargo mile demand stagnated in 2019 only to be hit with a formidable externally generated negative market force which continues to hamper any sort of recovery let alone growth.
Further consider that this externally generated force leaves owners and market participants at large, with only one remedy to pricing malaise (prices in our case are represented by charter rates), that of supply side adjustments. This is something that has been met with a massive amount of reluctance in the crude tanker market even as this bear has set its claws firmly in place.
By supply side adjustments we mean vessel retirements or planned slippage. But with the orderbook so thin there is little room for any sort of planned slippage to make a significant impact. Therefore, the market has been waiting for a fair number of demolitions to emerge, however that has proven just as painful as Waiting for Godot.
This comes as sufficient time has lapsed since the tanker culling in 2016 which has allowed a whole new wave of vessels to hit the vintage mark.
As if antique vessels operating in loss making territory for what is likely going to be a more prolonged period isn’t enough of an impetus to move some vessels to the beaches, the last VLCC retired on July 3rd fetched $560/LDT. This is a whopping sum that eclipses 2011’s lofty highs and even sets a record for this century.
Yet owners continue to resist even as the market is providing them with every reason to beach older vessels. Looking ahead, it seems logical that if that anticipated 2021 H2 rally doesn’t materialize, the demolition market should become a bit more heated as owners reevaluate the cost/(future) benefits of owning them.
While some economies are experiencing a return to normal others are witnessing major setbacks which can be attributed to lackluster vaccine penetration and/or the emergence of the highly contagious Delta variant.
Recall that a uniform and successful vaccine rollout across the globe was a key pillar to the optimistic crude tanker rebound scenario in H2 of 2021. Unfortunately, this rollout has been highly fragmented and less than successful in many areas which has stymied the resurrections of travel and leisure.
This situation appears unlikely to make a sharp turn for the better in the near future leading to the conclusion that not nearly as much progress will be seen in H2 of 2021.
This comes as over the next 18 months we can expect delivery of approximately 66 VLCCs, representing a 7.9% gross increase in vessel numbers. Considering vessel supply increases recently and the growth forecasts ahead it is becoming difficult to make an optimistic bull case for 2022.
This means that while the demand side may make progress, unless we see close to double digit demand side gains the market will be unable to tighten to a meaningful degree which would promote an exceptional YoY improvement in spot or TCE rates.
We may see some brief moments in H2 of 2021 that could send rates up, creating some fleeting optimism, but the factors behind that move will likely be short-term in nature. The longer-term structure instead points to a more difficult climb back to previous levels as the demand recovery has yet to see full global vaccination harmonization while the vessel supply outlook looks particularly challenging over the next 18 months.