Picking out the ship segment which offers the best fundamentals, in order to invest in new vessels is among the core assets of a successful ship owner. However the volatility of the markets during the past few years makes this decision a rather tricky one. For instance, in a recent report, Poten & Partners argued in favor of the Suezmax segment, which appear to be a good investment again. The words “appear” and “again” is what it’s all about, finding the right market at the right time.
According to Poten, “several tanker owners have recently placed orders for Suezmax tankers and market pundits have discussed the merits or, in some cases, the potential pitfalls of the renewed interest in this segment of the tanker market. The last time the Suezmax sector experienced a significant number of Suezmax tankers were ordered was some five years ago. The current fleet contains 52 vessels (representing 12% of the total) that were ordered between December 2009 and June 2010. In hindsight, the timing of these orders was less than ideal. Is the situation different today?”, Poten asked.
According to the analyst, as is usually the case, there are a number of different factors to consider. Among the most important: 1. What is the outlook for this segment? 2. Where are Suezmax newbuilding prices from a historical perspective and relative to secondhand prices? “Despite the recent jitters in the oil markets and some concern about economic growth in China and Europe, the general consensus about the outlook for the tanker market remains cautiously optimistic. The Suezmax segment has adjusted well to the changes in global trade flows as a result of the shale oil boom in the United States. While fixtures from West Africa to the US Atlantic Coast have dropped precipitously in recent years, movements to North West Europe, the Mediterranean and India have picked up. The largest boost for Suezmax employment has been the growth in liftings from the Arabian Gulf. Based on activity to date, reported Suezmax fixtures ex-Arabian Gulf could reach 600 in 2014, compared to 333 reported fixtures in 2012 and 215 in 2010. Another bright spot for Suezmaxes has been the growth in long-haul fuel oil movements from the Atlantic to the Pacific. The number of reported Suezmax fuel oil fixtures has tripled since 2010. Barring a collapse in worldwide oil demand, Suezmax employment should remain fairly healthy in the coming years”, Poten noted.
It went on to state that “we believe that the current Suezmax orderbook stands at 60 vessels or 14% of the existing fleet, similar to the VLCC orderbook, but much lower than the backlog for MR’s. Another comforting factor is the actual orderers themselves. Most of the recent contracts have been placed by experienced Suezmax owners with a proven operational and commercial platform and track record. There is no indication that speculative money is fueling the recent uptick in orders”.
Poten concluded its argument by noting that “last, but certainly not least, is the economics. Prices of modern secondhand vessels have picked up since the market started to recover in late 2013. One year ago, we estimated the value of a 5-yr old Suezmax to be $38 million. Today’s assessment for the same vessel is $55 million: an increase of 45%! This price increase could be a reflection of a positive market outlook as well as a very tight secondhand market, as there are very few modern Suezmaxes from quality yards for sale. Newbuilding prices have not moved nearly as much as secondhand prices over the same time period. Our price assessment for a newbuilding ECO Suezmax is $68 million today, only 4% higher than the price a year ago, with some recent orders reportedly done at prices that are even $5-10 million lower. Based on these prices, the 20-year breakeven rate for an ECO newbuilding is in the $20 –$22,000/day range and with the 5-year time-charter rate for modern vessels at $28,000/day, newbuildings appear to be a fairly attractive investment”, the analyst concluded.