Drewry: Fleet Growth Will Put Product Tankers Profits Under Pressure

A new report released by Drewry suggests that product tankers will see their earnings decline due to coming fleet growth.

In its Product Tanker Market Annual Report 2015, Drewry Shipping Consultants Ltd (Drewry) says that a growing fleet will negatively impact sector earnings in the medium term.

“Although seaborne trade volumes for refined products will continue to grow at a healthy rate over the forecast years, we expect freight rates to come under pressure in the near term,” said Nikhil Jain, Lead Analyst for Drewry.

Of the 11.4 million DWT in product tanker fleet growth between 2012 to 2014, 8.2 million DWT is said to be due to a switching of trade from chemical to refined products.

Spurred by factors including U.S. shale oil production and growing oil demand in emerging economies, Drewry says it expects the tonne-mile trade for products to experience steady growth.

Despite a growing product trade and increasing average voyages distances, the combination of the considerable trade shift and a “hefty” number of newbuild deliveries over the next two years, means freight rates will be subject to downward pressures, asserts Drewry.

“Tonnage demand (in tonne-mile terms) for product tankers is projected to rise at a CAGR of 2.8 percent over 2014-20 (compared to 2.9 percent over 2011-14), with the bigger MR2 and LR2 segments accounting for the majority of the increase over the forecast period.”

However the tonnage swing to the products trade, as well as newbuild deliveries, will see tonne-mile supply increase to 3.5 percent per annum during 2014 to 2020, outpacing demand particularly during 2016 and 2017.

"A widening in the tonnage supply-demand gap and consequent decline in fleet utilisation rates during 2014 and the first half of 2015 has failed to depress freight rates for products tankers, which have benefited from the recent surge in crude tanker rates and overall market sentiments," explained Jain. 

"However, when the dust settles, rates are anticipated to decline in line with falling utilisation levels during 2016-17.

"The market is expected to stage a recovery, albeit a modest one, from 2018 onwards, provided ship owners abstain from repeating another round of excessive tonnage ordering as seen in 2012-14.”

In August, Eirik Haavaldsen, of Pareto Securities, forecasted that the tanker market will continue with its robust growth until and including the first quarter 2016.