There have been two historic shipping booms since the turn of the century. Could a third be around the corner?
The first, in 2003-2008, was driven by a surge in Chinese demand as that country came onto the world trade stage. All shipping sectors benefited, with dry bulk the big winner, and secondarily, tankers.
Greek dry bulk owner Aristides Pittas said at a ship finance conference in 2013, “If you look at the fantastic times we had in 2003 to 2008 and the money that was made, and you think that this will be happening again, I can tell you: This will not happen again.”
Then it happened again. In 2021-2022, container shipping experienced a historic spike in profits, fueled by a surge in consumer-goods buying during the pandemic. COVID played the demand driver role that China did in the prior shipping boom. One shipowner who owned dry bulk vessels in 2003-2008 as well as container vessels in 2021-2022 told FreightWaves that the container shipping supercycle was actually the stronger of the two.
The focus now is on crude and product tanker shipping. Optimism is being fueled by an unprecedented shortfall in new capacity coming online and trade dislocations caused by the Russia-Ukraine war.
The phrase “supercycle” is once again being bandied about. The 2003-2008 and 2021-2022 booms were unpredicted and demand driven. The predicted tanker boom, if it happens, would be largely driven by vessel supply constraints.
‘I can’t poke holes in it’
The mood on tankers was ebullient at the 17th Annual Capital Link International Shipping Forum held in New York this week, albeit with an undercurrent of “is this too good to be true?”
“This happened 15 years ago and was not supposed to happen again but here we are. Everything’s flashing green,” said Ted Petrone, vice chairman of Navios Corp. (NYSE: NMM).
“What happened in the container market completely encapsulates this [tanker] market,” Petrone continued. “Containers didn’t make a dime for 10 years, then in two years they made a decade’s worth of money. That’s shipping. You have to control your risks and control your costs and be in position to make money when you can. That’s where we are now.”
According to Ben Nolan, shipping analyst at Stifel. “With tankers … I can’t poke holes in it. It feels more obvious now than in any of the last 20 years I’ve been trying to do this, which makes me really nervous. It seems too obvious.”
Bob Burke, CEO of Ridgebury Tankers, said, “I’ve been doing this since the ’80s. I have never seen it so strong. I think the next two years are going to be great, just like they are now. But I also think something will happen that is one in a thousand.
“There are a lot of things that are one in a thousand, so the chances are actually more than one in a thousand. So, I would say something will change, nothing that we can predict right now. It could be strongly to the upside or to the downside.”
Anthony Gurnee, CEO of product tanker owner Ardmore Shipping (NYSE: ASC), said, “I think what’s really at play here is recency bias.” Recency bias gives greater importance to more recent memories. “I think we’re all scarred from 10 years of weakness. You can almost hear it in our voices as we’re talking about the market and the outlook. I think there are psychological factors in play.”
According to Clarksons Securities analyst Frode Mørkedal, “When I look around, people don’t seem to be willing to take a bet on next year yet. So, I think there’s a lot of upside potential.”
Look to tanker customers, not tanker execs
What panelists say at shipping conferences is often suspect, because shipping executives generally overemphasize the positives, whether because they believe it’s their job to promote their company’s future profit potential or because — via career “natural selection” — shipping executives are inherently optimistic.
Shipping supercycles are extremely rare; even moderate upturns are uncommon and often fleeting. False starts are frequent. Shipping executives spend most of their careers putting on a brave face amid multiyear cyclical downturns, clinging to whatever crumbs of good news and glimmers of hope they can find.
“I’m permanently optimistic,” said Robert Bugbee, president of Scorpio Tankers (NYSE: STNG), during a luncheon speech in New York in January. “You have to be optimistic in this industry to remain sane and keep going at times.”
All of which leads to many false alarms on impending upturns from shipping executives speaking on conference panels. More important is what tanker customers do, not what tanker owners say.
James Doyle, Scorpio Tankers’ head of corporate development, said at the Capital Link forum, “Rather than all of us up here saying we believe in this market, it’s [more about] when you have Exxon, Shell and BP coming out and saying ‘we agree and we’re willing to put our capital toward it.’”
Spot rates are highly volatile. The big test of whether an upcycle is sustainable is whether charterers bite the bullet and sign multiyear charters to protect themselves from future pain in the spot market, at period rates that are highly profitable to shipowners.
“What drives the period market is pain in the spot market,” said Petrone. “We’re now seeing major oil players talk about doing more longer-term deals, because they see the same numbers we do.”
3-year charters: Still a long way to go
If and when the current tanker upcycle reaches a sustainable level, oil companies will book many more charters for three years in duration or longer, at high rates.
Listed owners that have had their fleets almost entirely in the spot market over the past decade will evolve into companies with heavier time-charter coverage, supporting hefty dividends, the pattern seen in 2003-2008.
Panelists’ comments on the three-year charter market were mixed. Most of the positive comments focused on product tankers, not crude tankers.
Spot rates for very large crude carriers (VLCCs, tankers that carry 2 million barrels of oil) are hovering around $100,000 per day. But charterers do not yet seem to be worried about being on the losing end of a multiyear spot-rate boom. They’re not yet covering their exposure to future spot exposure in a significant way.
“I don’t believe we have seen real liquidity, particularly for VLCC time charters of three years-plus,” said Lois Zabrocky, CEO of International Seaways (NYSE: INSW). “We haven’t seen that yet. I think it has to continue to build before that market develops and has the liquidity that would be more reliable for owners.”
According to Petrone, “I think going forward that oil companies that have said for the past 10 years, ‘I’m going to put 5% of my portfolio on long-term deals and I’ll probably lose money on those, but I need them just in case something blows up,’ are going to say, ‘I need 20% covered on a long-term basis.’ We’re seeing a lot of calls come in.”
The three-year charter market on the product tanker side sounds further along. According to Doyle, the three-year market for product tankers is “active and liquid.”
Scorpio is in the process of shifting more of its fleet from spot to long-term charters. It now has 15 of its 113 tankers placed on charters of three to five years. The rates it’s getting are rising.
Among its three-year deals, Doyle said Scorpio chartered the first LR2 (a long-range product tanker with capacity of 80,000-119,999 deadweight tons) at $28,000 per day last summer. It booked another in December for $37,500 per day. It announced a new three-year LR2 contract on Tuesday at $40,000 per day. (In comparison, Clarksons estimates current spot rates for modern-built L2s are $59,500 per day.)
What happened in 2003-2008
The 2000s supercycle generated unprecedented returns for dry bulk shipping. It was more mixed for tankers, with ups and downs.
The years 2004, 2005 and 2008 were very strong for crude and product tankers (some size segments did better than others). In 2006 and 2007, the Baltic Clean Tanker Index was around the level it is today. The Baltic Dirty Tanker Index was below current levels in 2006 and 2007.
Analyst reports and financial filings from that earlier era portray a tanker market at a much different stage in the cycle than today’s. Long-term charter coverage was much higher.
Charterers did not move fast enough to protect themselves against the initial spot rate surge in 2004. In January 2005, brokerage and consultancy Poten & Partners published a report on how much more charterers paid as a result of their delay.
“As term chartering managers approached the end of 2003, they were facing a three-year term market with rates around $31,000 per day for a VLCC and a spot market at just over $87,000 per day.
“What is amazing is that very few three-year charters were concluded despite numerous owners who expressed interest in doing term business,” said Poten.
Poten estimated that a charterer would have paid $20 million less per VLCC in 2004 if it had signed a three-year charter versus continuing to play the spot market.
“Most charterers were fighting to get the owner to lower the [three-year] charter premium another $500 per day. Rather than paying this additional ‘premium,’ charterers in effect said, ‘We do not want to pay the $182,500 additional charter hire per year — $500 times 365 days. We will face the risk of high [spot] rates.’”
Eventually, charterers capitulated and took cover in the period market. Tanker owner General Maritime had 28% of its ships taken on time charters at the beginning of 2004. By 2007, according to an analyst report from Dahlman Rose, General Maritime had 73% of its operating days covered by time charters.
Dahlman Rose put three-year time charter rates at $70,000 per day in mid-2008, more than double three-year rates at the end of 2003.
By mid-2008, Frontline (NYSE: FRO) had 43% of its capacity on long-term charters, with Teekay Tankers (NYSE: TNK) at 44%. As of now, Teekay Tankers had only one of its 45 ships on time charter. Frontline has only seven of its 70 ships on time charter.
Despite ups and downs in freight rates during the 2000s supercycle, tanker values continue to rise. According to Dahlman Rose (citing Clarksons), the value of a 5-year-old VLCC rose from $60 million in late 2003 to $165 million in mid-2008, a surge of 175%.
And then, everything collapsed. By mid-2009, 5-year-old VLCCs had shed half their value. One of those one-in-a-thousand events that Burke warned about had happened — the global financial crisis — and the supercycle was over.
(Charts: Dahlman Rose Marine Transport Weekly, Dec. 7, 2009. Chart data: Clarksons)
Click for more articles by Greg Miller
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