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Tanker Newbuilding Market: Cautiously Optimistic

June 23, 2023

Tanker newbuilding prices have been on an upward trend since 2021, bolstered by rising prices of raw materials (Figure 1), inflationary pressures in labor markets post Covid, and the tight shipyard capacity due to an orderbook full of container ships and gas carriers. Tanker owners scarred by the low earnings environment from 2017 to 2021 were not ready to jump on that bandwagon resulting in historically low tanker newbuilding orders in the past two years.  The year 2023 had only 9% of the global yard capacity used for tankers, compared to 38% for container ships.  However, now that container freight rates have come back to earth and container orderbook has shrunk; the tanker market - supported by Russia’s presence in Ukraine - saw record earnings by tanker owners which has encouraged renewed ordering activity, especially for the mid-sized tankers (Aframaxes and LR2s).  Regard to other tanker segments, the majority of the recent orders are compliant with new environmental regulations, e.g., alternative fuels (ex. Hafnia ordered four methanol dual-fuel MR2s at US $50 million each followed by Troim’s LNG dual-fuel VLCC order at US $130 million each).

There are a few mixed signals amid this flurry of elevated earnings, the changing regulatory environment for ship operations (Marpol Annex VI – CII, EEXI), and availability of new technology. Tanker shipowners flush with cash should theoretically jump back into ordering; however, the still historically high tanker newbuilding prices are making some reconsider causing the owners to adopt the “wait-and-see” approach. Meanwhile, some shipowners (like Hafnia) are coming back but justifying these investments with new technology and committed work, thus reducing risk.  As we move into the second half of 2023, our statistical model is projecting tanker newbuilding prices with a downside correction.  The price drop could be mainly explained by the “free-fall” in coking coal prices since the beginning of the year, as China lifted all import restrictions on Australian coal.

Figure 1: Historical and Forecasted Tanker Newbuilding Prices (left); Steel Price Forecasts (right)

Source: McQuilling Services, FRED, CME