Vessel supply can be a dicey issue for the product tanker segment. Not only do they have some of the shortest construction times, meaning a two-year supply outlook is nowhere certain, but we also see the tone of the market being dictated to a great degree by the smaller MR class vessels, which is unique among the shipping segments I cover.
So, let’s focus in on the MR2 class (41,000-54,999 dwt), which is the epitome of the above paragraph.
The 72 deliveries (as of 12/14/20) in 2020 comes against 10 total demolitions, for a net gain of 62 vessels representing just over 4% fleet growth.
Typically, this would be an acceptable amount of tonnage to introduce throughout the course of a year, however, the demand destruction we experienced mid-year created a massive void.
Remember, 2019 saw higher net fleet growth both in terms of numbers and percentages, but we ended the year with rates in the high-$20k/day range.
2021 will see net fleet percentage growth roughly align with previous years, meaning the supply side continues to do its part in bringing this market toward equilibrium.
Over one-third of the scheduled deliveries for 2021 (31 to be exact) are set to take place in January-March. This means that the remainder of the year will hopefully be met with recovering demand (as mass vaccinations allow for travel and leisure to return) and waning vessel deliveries.
This is a fortuitous set of timing for the market as both supply and demand look to be setting up for a Q2 and beyond rebalancing. Though, this will likely be slower than many would like at first as the market takes some time to absorb this minor influx of vessels while demand normalizes at its own pace.
But in the meantime, this short-run depressed market outlook brings with it the potential for increased demolitions just as demo prices are approaching multi-year highs.
Remember, the gap between resale and demo value often dictates what happens to a vessel when it is older. To illustrate this, look at the vessel snapshot below with an eye on the timeline of when market and demo values closed.
Look at how that gap has again started to close for this nearly 24-year-old tanker. Many know there is a direct correlation to increasing scrapping rates during down markets, especially once this convergence between price and demo narrows or closes completely for vintage vessels.
However, in this case, the short-run aspect of this projected downturn is important in this outlook making it harder to part with vessels merely on the verge of aging out. Therefore, we may see slightly increased activity, but nothing extraordinary and likely nothing sustained over the longer term.
Newbuild orders will set the tone for future markets, but with such short construction times the profusely bullish seven vessels expected in 2022 are hardly set-in stone. Likely, we will see several more orders placed between now and the end of next summer which can easily be slotted into that 2022 delivery window.
But newbuild ordering has remained muted as of late.
The chart above not only shows this aversion to newbuild ordering in recent years, a structural market phenomenon supported by multiple factors, but the recent downturn which correlates to the market weakness as of late.
The consequence of structural market issues is best viewed through the next chart. Notice the past few years have been the exception to the rule with a prolonged duration of lackluster activity that has not been matched in over two decades.
Additionally, consider the relative nature of using vessel numbers as a data point when discussing a trade that has grown considerably over the past two decades in terms of both demand and fleet size, hence the addition of the fleet development data in the chart above.
Shipping aficionados will recognize the above as factors composing the orderbook, which is pictured below in this simple chart.
However, sometimes the picturesque simplicity belies the complex nature of the market structure behind this move, and the growing tendency toward a market shift as a result, which is why it can be helpful to review what is behind this chart.
With forecasts for an ongoing slow market through the first part of next year, and no major catalyst for a sudden market structure shift regarding newbuild contracting, we have potential to see an anemic delivery schedule in 2022. If this holds, 2021’s supply side will offer up rebalancing potential while 2022 holds the possibility for further improvements.