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Patrick Rodgers, Chief Executive Officer of Euronav, one of the world’s biggest listed tanker companies, will be one of the panellists at the Global Forum at Sea Asia 2017 Conference, held during Singapore Maritime Week 2017. He and other thought leaders will share their outlook on the world economy and the regulatory environment, and how these and other macro issues will impact shipping. He shares with Singapore Nautilus how the tanker sector will be shaped by key global developments.

What is your outlook for the crude tanker industry in the short to medium term? What are the key factors or developments that will impact the industry?

I am cautious about the short term and positive about the medium and long term. At Euronav, we look at five key drivers for our business. Firstly, the demand for crude oil, which has been consistently growing over the longer term. There have been just two negative years for growth globally since1990. We expect this to continue, stimulated by economic expansion in Asia and a lower oil price.

Secondly, we look at vessel supply. There are around 50 very large crude carriers (VLCCs) and 50 Suezmax vessels due for delivery in 2017. Once this supply has been absorbed into 2018, the outlook becomes more positive. This is because new ordering has slowed substantially in the past 12 months due to owner discipline, restricted financing, and shipyard contraction, which have combined to reduce new supply.

Thirdly, tanker ton-mile has a mixed short-term outlook as production cuts led by the Organization of the Petroleum Exporting Countries (Opec) have begun to bite, thus restricting the amount of oil being shipped. But in the medium term, growth in demand from the Asia-Pacific region for oil sourced from either the Middle East or the Atlantic is positive for ton-mile development.

Fourthly, with the increased supply of shale counterbalancing the Opec reductions, oil supply is currently balanced in our view. However, although exports from the United States are growing strongly, they are doing so from a low base, which is not enough to offset lower ton-miles in the short term. Oil supply in the longer term is a difficult dynamic to predict given geopolitical risks, but should the oil price remain between US$40 and
US$70, then we believe that US shale can continue to grow and remain a positive driver for tankers.

Finally, in terms of financing, it is positive in the short and long term as the banking sector continues to restrict financing for shipping. We believe this is a structural change, and a barrier to entry for new participants to tanker shipping, especially given the cost of large tankers.

What impact will international environmental regulations have on the tanker market?

At Euronav, we see this as a positive development, but one which will take time to have a tangible impact. Any application of tougher environmental legislation adds cost to shipowners, which will then result in further consolidation within the sector.

Increased costs will require greater investments which may, over time, result in an increased level of scrapping. This is because as vessels age, owners will have to decide whether the increased costs will be worth the investments, based on the likely freight rates until the next scheduled dry docking.

Based on current projections, over 100 VLCCs will be over 20 years of age by the end of 2020. And if we go by current International Energy Agency (IEA) demand forecasts for 30 to 40 new VLCCs every year, incoming regulations could be a positive driver for the tanker market.

What will be the key growth areas for the crude tanker industry?

There are several. Firstly, the Far East is sourcing oil from further afield; this should lead to higher ton miles, which is positive for tankers.

Secondly, the further development of the shale industry in the US should continue to keep global oil supply at elevated levels and act as a potential cap on oil prices. In view of this, the oil price should remain between US$40 and US$70 and continue to stimulate demand, thus maintaining a tailwind for tankers. The IEA has forecasted that demand will grow by 1.4 million barrels per day (bpd) in 2017, and that annual average demand will grow by 1.2 million bpd from 2018 to 2022.

Finally, stricter regulations should drive an increased level of scrapping from 2017 to 2020, as a significant portion of the global fleet will be over 20 years of age during this period. If this is combined with greater discipline from the banks, restricting lending capacity, and owners themselves not ordering new vessels, then this should translate into better balance between demand and supply for tankers.

What is the single biggest challenge facing the shipping industry currently?

I can only speak for large crude tankers but it would be the shipyards. Owners must resist placing new orders for tankers and the temptation of lower prices being offered by shipyards, primarily from South Korea. This is important because the tanker market has an opportunity to break the boom-bust cycle of the past 40 years. If it can achieve this, then there is a chance we can develop a more rational sector financed more
from capital markets than bank loans, which will generate more visible returns for investors. This year, 2017, will be a key year to watch for this development.

How can we create a stronger shipping industry?

One word – discipline. This is easier said than done. Discipline across the sector will make for a stronger shipping sector for all participants. This isn’t about aggressive pricing or market share, but about building a safe, secure industry with zero tolerance for irrational behaviour as well as dangerous or illegal practices. Banks are leading the way by restricting the amount of capital available for shipping in general. All participants need to follow this lead going forward. We will benefit from increased regulation that is uniformly applied and impartially enforced.

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Extra information about this article

Title Patrick Rodgers shares why he believes the tanker market will remain a bright spot in shipping
Author Maritime and Port Authority of Singapore
Date 04-04-2017