Inflation Hits Oil Tanker Newbuild Prices Hard

Crude oil tanker owners’ shares are up today on news that increasing newbuild rates are driving up the value of existing fleets and could prevent the others from overbuilding. Overseas Group $OSG and Frontline $FRO shares are both up over 6% in morning trading.

by John Konrad (gCaptain) If you think the price of groceries or a used car are high due to inflation, try buying a new crude oil tanker. According to a new report by the tanker brokers Poten & Partners Very Large Crude Carrier (VLCC) newbuilding prices have increased 35%, from $88.4 million in January 2021 to $119 million this month but still have a ways to go before reaching their all-time peak of $162.5 million in 2008.

Secondhand prices are strong too. Over the last 12 months prices for 5-year-old VLCCs crude oil tankers are up 23% and 10-year-old VLCCs 31%. This means that the value of a tanker company’s existing fleet has increased alongside recent tanker rate increases.

Poten says the current market is being driven by a combination of strong demand and tight supply. During the last strong VLCC market that started in 2003, it was Chinese demand driving up freight rates but this time it’s strong crude and product demand in the US, Europe and Asia (as the world recovers from the pandemic) and a lack of available vessels.

The pandemic has forced many vessels out of the fleet (scrapping and layups) and there has been very little newbuilding activity during the pandemic. As a result, there are not enough tankers to meet demand.

One more factor pushing costs higher is ESG. The world is now very focused on addressing climate change and reducing global emissions, while this was not a significant factor in the last cycle. With uncertainty about new regulations and fuels, tanker owners are reluctant to build. Once they do decide on new fuels (e.g. ammonia or green hydrogen or batteries) the cost of building a ship with these technologies could be high.

Haven't seen anyone mention the Webber Research ESG scorecard in a while. "The companies that had the strongest ESG scores within our framework were $GNK, $EURN, $INSW, $EGLE, $ASC, $TRTN, $MATX, $GRIN, $DHT, $INT, $TRMD, $KEX, and $OSG." pic.twitter.com/zt9EtAIHkJ

— E. Finley-Richardson (@ed_fin) May 7, 2022

Also Read: Shipping’s New ESG Rules Could Starve Millions

The problems in the supply chain and the volatility of commodities like steel are also driving up newbuild costs.

“As a result of higher steel prices and more expensive components, as well as environmental modifications such as scrubbers or dual fuel engines, newbuilding will likely remain more expensive than older secondhand units,” says the Tanker Research & Consulting department at Poten & Partners. “So far, newbuilding prices have increased faster than secondhand values in the current cycle. However, this will likely change if rates continue to recover.”

This is all good news for VLCC owners like International Seaways $INSW who have already invested in updating their ships with ESG-compliant emission scrubbers and Overseas Group $OSG which operates Jones Act ships that must be built in the United States and therefore costs more to replace.

Wow $OSG waking up +7% on well over its daily volume already. On track to have a very good year with OVER $100M EBITDA (based on their Q1 earnings, which the market has improved more since). pic.twitter.com/CJgzU3Z8Fy

— Chris Shipping ?? (@christankerfund) August 1, 2022

This report comes after product tankers companies – the ships that carry refined products as opposed to crude oil – have reported record charter prices and Scorpio Tankers  $STNG anticipates the Russian oil ban will superchare rates.

“In the second quarter, Scorpio Tankers made its biggest quarterly profit in the company’s history,”  said Scorpio tankers CEO Emanuele Lauro on Thursday.   “Our customers expect the current market conditions to be sustained as shown by the rise in time charter rates, duration, and activity, and we agree with them.”