Just as 2015 was a disastrous year for the bulk carrier industry, a situation likely to continue through to 2017, so also was 2015 a memorable year for the tanker industry. This sector started to take off in the fall of 2014 after a long drought that had its start in the 2008 recession. The tanker freight market was very strong through 2015 and should remain strong through at least 2016 according to industry forecasters. That is until the usual spate of over ordering new ships goes from a trickle to a flood, as is now happening with VLCC and Suezmax, the main crude carriers being particularly hit. Some ordering is always essential to replace with ‘new for old’ but when ship owners go crazy, that is when they end up with severe financial indigestion as we have seen with dry bulk and are seeing again in containers.
Over ordering is not a new phenomenon. It is in fact like a pendulum that goes with the shipping cycle, but what causes it and who instigates it is quite hard to see clearly as many contribute to it and for different reasons. To be fair, over ordering when initiated may look like a touch of accretive genius when markets are prospering. It’s what can happen when trade falls off, freight rates collapse and demand diminishes in a significant way that what was a balanced fleet suddenly develops fleets of under-employed ships. The truth is that when demand and supply are in perfect balance, it is almost momentary and therefore seldom arises.
Photo above: Teekay's LNG's Yamal LNG Carrier new build, ice strengthened for year-round Arctic service. Photo source: Teekay Group
As I’ve said before, the basic element is plain, ordinary greed. However, there is a great deal more to the issue beyond human frailty as it has long been an axiom of ship owning that owners place orders for new ships at driven down prices when shipyards, hungry for business, will go a long way to get an order at any cost short of bankrupting the yard and creating a closure which, once in the hands of creditors, usually becomes permanent. Nowadays, as an economic factor, owners will order off a more or less standardized design to save money and if a shipbuilder can obtain a big fat order, or series of orders for a significant multiple of sister ships at a price that gives him a reasonable profit because of standardization and repetition, he undoubtedly sees himself as fortunate.
The dry cargo market has always been subject to wild oscillations with hundreds of owners, mostly private, jockeying for sometimes scarce cargoes. It is only since the growth of large, powerful private owners including such famous tanker owners as the Greeks, Onassis and Niarchos, Norwegians Erling Naess and Sigval Bergesen, and American Daniel K. Ludwig followed by a number of others like John Fredriksen with a singular dedication to tankers, that the market has gradually been affected to such an extent by rate gyrations. Up to about the 1960s, the bulk of tankers were owned by large international oil companies. The fleets owned by Shell, Exxon and BP in particular were vast and provided a stabilizing effect in maintaining an orderly market. Their vessels were seen everywhere and it was their lead that was followed by many other oil majors. Because they owned most of the tonnage, they operated and built new tonnage according to well-defined needs and originated all the cargoes they carried. It had a stabilizing effect on tanker markets so that, for example, tankers were far less affected than dry cargo shipping and did not suffer the massive layups that the Great Depression brought for freighters. The private owners worked their way into tankers through providing a safety valve for the oil companies, who would disengage from charters when the markets deteriorated. Most privately owned tankers were engaged on two- to three-year charters, until the leading owners after the Second World War persuaded the oil companies to take them on, typically with seven-year charters, so that they could fully amortize their ship mortgages and complete the time charter with a clear title vessel.