Are Secondhand Crude Tankers Still in Demand?



Newbuild vessel prices

Newbuild vessel prices fell once again in February 2017. For the past several months, newbuild vessel prices have been on a downward trend. VLCC (very large crude carrier) newbuild prices fell 12% in 2016, and Suezmax prices fell 15%.

According to data from Athenian Shipbrokers for February 2017, newbuild prices were as follows:

  • $81 million for VLCCs, a fall from $82 million in January
  • $53.5 million for Suezmax, similar to prices in January
  • $43.5 million for Aframax, similar to prices in January

Newbuild vessel values signify the expectations of freight rates going forward. Demand for newbuild tankers is falling, and companies aren’t ordering new vessels, so there’s been a fall in vessel prices.

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Secondhand prices remain constant

Five- and ten-year VLCC values for February 2017 were $62 million and $42 million, respectively. Prices remained constant since January. Suezmax and Aframax secondhand prices also remained constant since January.

Time premium

The time premium is calculated as the ratio of secondhand tanker values to the current newbuild price. We’ve taken the five-year vessel value as a proxy for secondhand prices. Assuming that a vessel’s life is 25 years, a five-year vessel would be worth 80% of the newbuild price.

If an industry participant has a positive outlook on the crude tanker industry in the short to medium term, it will pay a premium on secondhand vessels to obtain ships immediately. In contrast, if the outlook is negative, assets will be valued lower.

In February, the ratio rose slightly from 75.6% in January to 76.5%—still below 80%. The ratio fell compared to its level of 86% at the start of 2016. Freight rates have fallen steeply, with falling oil production and the tanker supply glut among the reasons why tanker owners aren’t ready to pay premiums for secondhand tankers.

The above situation indicates a bleak short-term outlook for companies such as Frontline (FRO), Nordic American Tankers (NAT), Teekay Tankers (TNK), Euronav (EURN), DHT Holdings (DHT), and Tsakos Energy Navigation (TNP).

Investors who are interested in broad exposure to industrial stocks can invest in the SPDR Dow Jones Industrial Average ETF (DIA).


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