Tanker oversupply to keep rates low in 2018

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Fitch Ratings has added its voice to concerns that the tanker sector faces weak rates for 2018 and that this may put pressure on the finances of some companies.

“A glut of new vessel deliveries and limited scrapping of older ships means the global tanker market will remain oversupplied in the near term,” it said.

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“This will keep freight rates low and shipping company credit metrics under pressure in 2018.

“Rates for suezmax vessels have already dropped by 39% in the first 10 months of 2017 following a 52% decline in 2016.”

Tanker capacity is expected to increase by 5% to 6% by end of 2017 from a year earlier, with a further 4% rise in capacity next year, the ratings agency said.

“This reflects orders placed in 2015 when tanker rates were high, with a large share of orders coming from Greece and China,” it added.

“Vessel scrapping has increased slightly, helped by higher steel prices. But only five VLCCs were scrapped in the first seven months of this year, while 36 new VLCCs were delivered in roughly the same period.”

Demand growth will probably trough in 2017 due to high global oil inventories and OPEC production cuts, Fitch said.

“We expect rising global oil consumption, higher US exports and gradually moderating oil inventories to drive a moderate increase in tanker demand in 2018. Demand could therefore rise by about 4%, potentially matching supply growth,” it said.

The ratings agency said this should halt the market’s deterioration, but it feels that tanker rates are unlikely to receive a significant boost without further vessel scrappage or slower capacity growth.

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“We expect tanker rates to remain at current low levels throughout 2018 though they should avoid the sharp falls of the last two years,” it forecast.

As a consequence, Fitch says this will keep credit metrics at shipping companies under pressure in the year ahead, although liquidity risks are limited due to generally healthy cash positions that are further enhanced by credit facilities.

“Companies with a large share of long-term contracts, such as Soechi and Sovcomflot, should be able to maintain relatively healthy operating profits, while those with few long-term contracts are likely to break even at best,” it warned.

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Dale Wainwright