The new ship market is expected to usher in a strong recovery

Oil transportation market outlook: The oil transportation market will continue to boom in 2023, and freight rates will remain at a high level

The growth rate of global oil consumption is in line with the growth rate of global GDP. In December 2022, the International Monetary Fund predicted that global GDP growth in 2022-2024 would be 3.2%, 2.7% and 3.2%, respectively. At the same time, the International Energy Agency (IEA) predicts that the growth rate of global oil consumption in 2022-2024 will be 6.1%, 1.6% and 4.9% respectively. According to the US Energy Information Administration (EIA) data, affected by the impact of the epidemic on demand and the global supply chain, global oil began to actively reduce inventories in the second half of 2020, in addition to the impact of the Russian-Ukrainian war in 2022, oil prices are at a high level, and global oil inventories are still in a inventory reduction cycle, and global oil inventories are at a near 10-year low. Overall, oil inventories and crude oil prices show a reverse relationship, in the future global oil consumption to maintain good growth expectations, oil prices are expected to drive downstream replenishment of inventory.

The conflict between Russia and Ukraine leads to the increase of global crude oil transport distance and the accelerated growth of crude oil turnover. In 2021, the EU will account for about 12% of global crude oil consumption, of which 29% will be imported from Russia. In 2022, due to the impact of the Russia-Ukraine conflict, the EU's oil imports from Russia are falling rapidly, and the International Energy Agency (IEA) data shows that Europe will import an average of 2.2 million barrels of Russian crude oil per day in 2021. Due to the conflict between Russia and Ukraine, Russian crude oil exports to the European Union and the United Kingdom fell 35% to 1.7 million barrels per day in August 2022 from 2.6 million barrels per day in January. In December 2022, the EU implemented a "price limit order" on Russian oil exports, which will further reduce the EU's demand for Russian oil, thereby shifting more demand to the United States, the Middle East and other regions, thus leading to an increase in global crude oil freight. Clarksons forecasts that the growth rate of global crude oil trade will be 5.1%, 1.5% and 3.2% from 2022 to 2024, the growth rate of global crude oil freight distance will be 3.8% and 1.5% from 2023 to 2024, and the growth rate of global crude oil turnover will be 5.3% and 4.7%, respectively. This will further increase the demand for global tanker capacity.

New delivery capacity remained low, and future new capacity continued to be tight. In 2021-2022, new delivery capacity will continuously hit its lowest level since 2015, stacking dismantling volume will remain at its highest level in nearly three years, and tanker fleet capacity growth will remain low. In terms of orders in hand and new orders, shipbuilders' tanker orders in hand and the proportion of orders in hand to existing capacity in 2022 are at a low level in nearly 20 years, and new orders of 2.1 million CGT are added, 63% lower than in 2021, also hitting a new low in nearly 20 years. The shipbuilding cycle is generally 2-3 years, and the decreasing number of new orders in recent years means that the new capacity is tight in the future.

Tight capacity and higher rates will cause shipowners to devote more idle and storage capacity to effective capacity. The increase in storage capacity and idle capacity will lead to a decrease in effective capacity. Oil storage capacity is generally related to the term structure of crude oil futures contracts, and when there is an expected arbitrage opportunity for crude oil forward premium, oil storage capacity will rise, and during the Tsarist Russian oil war in May 2020, the number of VLCC floats increased to 98, an increase of 36% from the previous month. Idle capacity is generally related to freight rates and transportation costs. For example, when oil prices are in an upward cycle in 2021, shipowners' operating costs rise sharply, and when spot income is low, idle capacity also shows a rising trend. When the effective capacity is tight and the freight rate rises, more idle capacity and oil storage capacity will be used to put into the effective capacity, resulting in a decline in idle and oil storage capacity.

It is expected that the global oil trade will continue to boom in 2023, and the oil transportation market will be tight in supply and demand. The outbreak of the Russia-Ukraine conflict in 2022 led to an oil embargo and price cap, and reshaped the global oil trade on an unprecedented scale. The resulting restructuring of trade grids and routes has resulted in a significant reduction in the efficiency of oil trade, which in turn has accelerated most oil transport segments from a slow recovery to a strong cycle. We predict that from 2023 to 2024, the growth rate of global crude oil turnover will be 5.34% and 4.72%, the growth rate of effective capacity will be 3.34% and 2.14%, the excess capacity of the international tanker transportation market will be accelerated, while the new capacity will be at a low level, and the oil transportation market will continue to boom in 2023, and the freight rate will maintain a high level.

Oil ship market outlook: the tension between supply and demand is highlighted, and the new ship market is expected to usher in a strong recovery

The improvement in oil shipping spot earnings in 2022 did not drive new ship orders. In 2022, shipyards' tanker orders on hand and the proportion of orders on hand to existing capacity are at the lowest level in nearly 20 years. According to the historical law, when shipyards' orders in hand are at a low level, the improvement of spot revenue will often drive shipyards to add new orders, but the situation is more special in 2022. According to Clarksons data, the average global tanker spot revenue in 2022 is 37,188 US dollars/day, an increase of 474% compared with 2021. However, shipbuilders ordered 2.1 million CGT of new tankers, 63% lower than in 2021. We think there are mainly the following reasons: 1. The ship price in 2022 is high. 2. Experiencing an overall loss in 2021, shipowners have insufficient motivation to buy new ships. 3. Excess capacity accumulated over the past years needs to be further digested.

High ship prices in 2022 and tight shipyard capacity have dampened tanker owners' willingness to place orders. Global orders for new ships (container ships, LNG carriers) increased significantly in 2021, correcting for the doubling of gross tonnage year-on-year to reach the highest annual order volume since 2014. At the same time, in May 2021, the price of 20mm medium thick plate in China reached a historical peak, rising 69% from the 2019-20 average price. The simultaneous rise in demand and costs has caused ship prices to soar. In addition, since the financial crisis, the global shipbuilding capacity as a whole has shown a downward trend, and the current global actual shipbuilding capacity in use has fallen by 40% from the peak level in 2010, and the sudden rise in demand has led to continued tension in shipyard capacity. As a result, high prices for new ships and continued constraints on shipyard capacity have combined to discourage tanker owners from placing orders.

The owner has just turned a profit and has little incentive to buy a new ship. In 2021, the oil transportation market freight rate continued to hover at a low level with high fuel oil prices, and the profits of the world's major oil transportation enterprises collectively plummeted in the first three quarters, falling by almost 100% or more. In 2022, the oil transport market began to recover, and most oil transport shipowners turned a profit, but based on the uncertainty of the oil transport outlook and the concern of excess capacity, most shipowners are cautious and have insufficient incentive to buy new vessels.

The excess capacity accumulated over the past years needs to be further digested. In 2022, with the recovery of the global economy, oil consumption needs to recover moderately, and the global crude oil turnover has returned to positive growth for the first time in three years to 4.1%. In 2021-2022, the new delivery capacity has continuously hit the lowest level since 2015, the stacking dismantling volume has remained at the highest level in nearly three years, and the tanker fleet capacity growth has remained low. However, the gap between supply and demand growth in the oil transportation market has been negative for five consecutive years since 2017, and it has turned positive for the first time in 2022. As a result, the excess capacity accumulated over the past years needs to be gradually absorbed, resulting in a lack of incentive for shipowners to buy new ships.

Second-hand oil tankers are the preferred choice for shipowners to supplement capacity, and the second-hand oil tanker market will increase significantly in 2022. The construction of new ships takes 2-3 years, and shipowners are cautious about placing new ship orders without generating substantial profits, so used tankers become the most direct and effective way for shipowners to complete capacity expansion. In 2022, the boom of second-hand oil tanker market has increased significantly. According to Vessels Value data, in 2022, the trading volume of five types of second-hand oil tankers totaled 616 vessels (+14.5% year-on-year), with a total transaction value of 11.643 billion US dollars (+27.0% year-on-year). Among them, the Afra and Suez tankers, which are mainly used to transport Russian oil, were particularly active, with a total value of $2.397 billion (+212.1%) for Afra tankers and $1.673 billion (+195.6%) for Suez tankers. Second-hand oil tanker transaction prices also rose sharply in 2022, with the Clarkson second-hand oil tanker transaction price Index increasing by 38.5% year-on-year. The second-hand tanker transaction volume, transaction value and transaction price index all hit the highest in nearly 10 years.

We believe that the 2023 tanker new ship market mainly depends on the following three factors: (1) ship owner profitability. The more profitable shipowners are, the more willing they are to buy new ships, and the profitability of shipowners depends on the level of freight rates. We judge that the oil shipping market will remain prosperous in 2023, and the supply and demand fundamentals will help to maintain freight rates at a high level. (2) shipowners' expectations of market prosperity and capacity supply and demand structure. In the case of high expectations of future market prosperity and tight supply-demand relationship, shipowners are more willing to buy new ships. In recent years, the new orders of oil tankers to remain low means that the future new capacity will continue to be tight, we judge that 2023 global oil trade will continue to boom, excess capacity will accelerate clearance, supply and demand is difficult to rebalance. (3) Ship age structure and environmental protection Convention. The aging of the ship age structure and the implementation of the environmental protection convention will lead to the need for shipowners to dismantle old ships, which will increase the need for shipowners to purchase new ships to improve their capacity structure. As of December 2022, the average ship age is 10.7 years, reaching a new high of nearly 20 years, while the EEXI and CII environmental protection conventions come into force on January 1, 2023, and more older ships are expected to exit the market in the future.

It is expected that the oil tanker new ship market will usher in a strong recovery market in 2023. The continuous prosperity of the oil transportation market, the gradual emergence of the tension between supply and demand of shipping capacity and the aging of the ship age structure are expected to jointly stimulate the willingness of shipping east to purchase ships. Among them, Afra and Suez tankers will benefit more from the reconstruction of global crude oil trade routes brought about by the conflict between Russia and Ukraine, and VLCC/ULCC will benefit more from the recovery of China's economy.