Product-Tanker Shipping's Long And Winding Road
Executives and analysts have been calling the products tanker recovery for years. They've been wrong for years. This time, it's finally happening, maintained Kim Ullman, chief executive officer of Sweden's Concordia Maritime (NASDAQ Stockholm: CCOR-B).
"We are convinced that rates are going to go up," he asserted. "The turning point has happened. It's going from big losses in 2018 to small profits in 2019 and then we expect things to take off."
During an in-depth interview with FreightWaves, the tanker boss explained why he's so optimistic about a sector that has proven stubbornly tepid — and why he believes IMO 2020 marine-fuel rule implementation will not go as smoothly as some people expect.
Fleet evolution
Concordia is an independent public company 52% owned by Sweden's Stena, which also handles Concordia's operations. Concordia listed in 1984 as a shipping investment company with a lean management team and a fleet of large crude tankers.
It turned its focus toward product tankers though the construction of 10 PMAX-class product tankers in 2005-11, each with capacity of 65,200 deadweight tons (DWT). The PMAX design features a wider hull than a standard medium-range (MR) product tanker, allowing for 30% more cargo with the same draft (water depth).
Rounding out its fleet today are two specially designed 50,000-DWT chemical/product carriers, a 158,000-DWT Suezmax crude tanker and a 50% share in two chartered-in MR product tankers.
To some extent, a ship owner's confidence in a market can be measured by its exposure to spot rates. The more spot versus time charter, the more owners believe (or at least, hope) rates will rise. Concordia will have 10 of its 12 owned product tankers on spot by year-end.
"Because we believe markets are going to go up, we're not going to accept the time-charter rates being offered today," said Ullman. "We could have chartered off half our PMAXes, but we said ‘no.' We could have extended the original charters. We said ‘no.'"
It's different this time
The product-tanker sector has been on the verge of recovering for so many years in a row that rebound predictions elicit déjà vu. More than one public company executive has trotted out the ‘broken record' metaphor on conference calls when highlighting his company's strong fundamentals amidst weak rates.
"The consumption of oil is going to go up, whether it's by 1.3 million or 1.4 million barrels/day or whatever, and we do not have a big orderbook," said Ullman, when asked about his confidence in rates. "The orderbook should never be above 10% and that's where it is now."
In part, he blamed longer-than-expected market weakness on overbuilding financed by "a lot of cash from Wall Street. We had a good story in 2012-13, and we order ships when we hear a good story, not when we have a good market."
One plus for today's supply-demand fundamentals is uncertainty on how to respond to future regulations on carbon emissions. Without knowing which engines and propulsion systems will pass regulatory muster in the decades ahead, there are fears of premature obsolescence and residual value risk that are delaying newbuilding investments.
"There is definitely a bit of confusion [on which ship designs to order] and this is definitely helping the orderbook stay low," said Ullman, adding, "I wish this confusion had been around for the past 100 years. We would have ordered less ships."
IMO 2020 insight
Another source of Ullman's rate confidence is IMO 2020, which will require ships not equipped with exhaust-gas scrubbers to use fuel with sulfur content of 0.5% or less starting Jan. 1. Concordia believes this rule will support rates by creating new arbitrage opportunities, fleet inefficiencies, new trades and floating storage opportunities, while also slowing average vessel speed.
"You'll have a lot of higher-sulfur fuel oils in the West that will be transported to the East to be further cracked down to a lower sulfur content and distributed from there, and much of that is going to go back to the West — that is one obvious thing that's going to happen," he explained. "You'll also see price changes all over, and that is going to make for more arbitrage opportunities and, therefore, more trading."
Product-tanker owners possess a unique insider's window on how IMO 2020 will play out, because their ships will be on the ‘front lines,' transporting compliant fuel to where it needs to be to serve the world's fleet when the rule comes into force. If compliant fuel is or isn't being prepositioned, product-tanker owner executives like Ullman will know it.
Asked by FreightWaves whether he believes all the compliant fuel necessary to supply the entire world's fleet is in place as of today — with just four months to go before the deadline — he confirmed that it is not. Furthermore, he said that he does not believe it will all be positioned by the beginning of next year.
"Even on Jan. 1 it will not be in all of the places it's needed. It will not be a case of everything being nice and dandy and readily available on that date. No. There will be a transitional period when there will be issues and difficulties in some parts of the world. No doubt. But we do think that there will [eventually] be enough compliant fuel."
Some market watchers had expected crude- and product-tanker rates to experience IMO upside as soon as this month as a result of refineries and fuel suppliers prepositioning compliant fuel. "I think the people doing that math were being a little too theoretical," said Ullman, describing the timeline as "delayed but not derailed."
He emphasized on the fuel transition: "It's going to happen and it will be a bit of a rude awakening. Things will be shaken up pretty heavily."
Concordia is not installing scrubbers to tackle IMO 2020; instead, it's buying compliant fuel and hedges on the differentials between high-sulfur fuel oil and marine gas oil.
Asked about the hedging, Ullman commented, "In the paper-market trading, it went up and up on expectations that the spread was going to be enormous, then things came down. But I think there is going to be a shortage of one product and it will be long in another and the spreads are going up again. I think everybody's in for a wake-up call come November."
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