I would like to welcome everyone listening in to Capital Link's shipping sectors webinar series. My name is Eugen Laugh, I am head of shipping equity research at DMD Markets, and today's webinar is going to be on the product tanker sector, discussing sector trends, developments, and outlook. Our discussions will be sector-focused. I will be moderating the discussion, and we are privileged to have with us key leaders from the industry who I will introduce shortly. But first, two quick remarks. First, a disclaimer: these webinars are for informational and educational purposes only and do not constitute investment advice or advice of any kind. You can submit your questions during the session using the button at the bottom of the screen or email them to questions at link.com, and these questions will be addressed at the end of the panel discussion. The questions should be primarily sector-focused. By the way, this webinar will be available as a replay later for those who would like to access it on demand.
So with that being said, let me now introduce our panelists. We have with us today from Hafnia Tankers, CEO Michael Scauff; from Dorian International Shipping, we have Carlos Balestra joining us as well; we have from Scorpio Tankers, Robert Bugbee; and finally we have Lois Zabrocky from International Seaways joining us as well. So I'm very happy to be here with leaders of this industry to figure out what's been going on and what to expect going forward. We've had a very strong period within product tankers now for the past couple of years, so I thought I'd start with the current picture and what you experience has changed or what has been going on in the recent months that has led to rates dropping off a bit, although not unusual perhaps for this time of year. Is there anything that we should be aware of? Let's start with Michael on that and then we'll go through the lines.
Thank you for this and thank you for inviting us to have a hopefully interesting debate on how we see the markets going forward. I guess in a way my initial comments to what you asked would be that we haven't actually seen a massive change in the fundamentals around tanker supply and demand in general. I think what we are seeing is an element of seasonal volatility, but admittedly a lot more than we would normally see from a third quarter to a fourth quarter. One of the main reasons why we have seen this drop in rates has clearly been that during the third quarter we did actually have quite a lot of crude tankers that took away, if you like, clean product transportation. And as we can see, most likely crude tankers loading clean products took away as much as 6% in ton-mile. What we're seeing now is that all of that is now falling away. The way we see the market is that we were negatively affected by a ton-mile reduction by crude oil tankers taking refined oil products. Lots of traders and oil companies have told us that this is not a repeated pattern because contamination issues and voyages that require too many disports has meant that this didn't turn out to be a great play for most of the people that took that chance.
Our expectation is now that you're going to get the 6%, so to speak, back in the end of fourth quarter, first quarter. For us it was just a strengthened negative effect of a seasonality that has kind of made the gap wider than we'd normally seen. Otherwise, for us that's nothing extraordinary, and we're quite convinced that we are now on the way back to an upturn as we would normally see it here by the end of Q4.
Okay, thank you. Lois, is this something that you see going on as well, especially with the crude tankers? What's sort of the status at the moment, would you say? Have those tankers returned home or are they still messing around on your turf?
You know, I would dovetail on the comments there. We're seeing them extricate and move back to their own sectors, so that's a positive, lifting off the clean markets. At Seaways we're strong on the MRs. Our LR1s actually trade dirty pretty consistently, so speaking specifically to our book on the MRs, you've still seen very healthy markets. Q4 book-to-date, as we shared when we did our recent results, you're still in the 20s — you're over $20,000 a day — and seeing the MRs really get a little busier here after Thanksgiving.
It is what we tend to say, isn't it, that Thanksgiving is sort of the kickoff for things on the product side. What about you, Robert? Do you see the same things? Has there been any change in sort of the inefficiencies that were leading up to the summer, post the invasion of Ukraine, or is that not the factor really?
No, that's not — I don't think the inefficiency, I don't think that has changed. One thing I would add to Lois and Michael: we saw a lot of refinery maintenance brought forward. A lot of the big Middle East refineries were shut; they're now started to come back up, and I think they're pretty well all up now. That sort of finished around about November 30th, and that resulted in an instant movement in LR2 requirement. So you're seeing a very strong firming in the Arabian Gulf already. Yesterday we had something that we haven't seen for a few weeks, which was there were seven LR2, what you would call, stranded cargoes that owners were not willing to offer near the rates that you're starting to see the potential for spikes. AG West was beginning of the week being worked at 3.4, and the desks are sitting there looking at — they're going to get four very shortly. I think that played into a factor about the refinery position. A lot of that was to do with bringing it forward; there wasn't the pressure in pricing. We've had a very, very warm winter and a warm start to autumn in the northern hemisphere.
So it's good, but it's very hard to talk about weakness. I think that everybody on this call would consider that what's happening now is pretty good, and is pretty good to extremely good, especially when you see something that none of us have ever had in our careers, which is very deleveraged balance sheets. So what is $30,000 this year in a market is the equivalent to almost $40,000 last year. If you were to model this on your actual cash flow return as opposed to just straight market data points, you would feel happy. The cash break-even has definitely improved, so that is a factor.
I wanted to add to that on this point, which I agree with what was said just now by the panelists, but I wanted to emphasize further that these lower exports that we have seen over the last two months — and there was quite a pronounced decrease in exports out of the Middle East — those were the ones which were actually driving the market in the first half of the year, which were making the market exceptionally strong because they are very rich in ton-miles and they are long voyages in any case. But they were particularly long voyages because of the fact that the vessels are sailing through Cape of Good Hope rather than passing through Suez.
This decrease in exports had a major impact on the market. I think that when they come back — and they will come back, and we're already seeing, as Robert referred to, an improvement in activity in the Middle East, and more will come in the course of December and in January and February next year — then I think the market can turn quite dramatically much stronger than where we are right now.
One last point is that over the course of the year, first semester but also through the summer, there was a buildup in stocks, in particular gas oil in the ARA region, which is also connected to the weakness in industrial activity in Europe, in particular in Germany. We see that gas oil demand this year worldwide actually decreased — it's expected to decrease by around 260,000 barrels per day. This increase in stocks is dampening demand for further imports into Europe, and it's also explaining some of the weakness now. But of course these stocks will be digested, other regions have very low stocks, and as they are digested, demand will return and we will go back to the dynamics we experienced in the first half of the year. I'm quite convinced about that.
That was to my question, because I was going to ask a bit on the fundamental demand here, because there's been quite a lot of talk on weakness, mostly I feel focused on China perhaps, but I guess Europe is also a factor. I don't know if anyone on the panel wants to add to that. Is that something to fear, or is it purely weather-related, or what's been driving this — especially the refinery margins, which I guess have been pressured downward? I don't know if you have any good takes on that, Lois.
I'll jump in and simply say it's very interesting because products, in a way, is a secondary market, right? As you see some of these refineries, their margins get squeezed. We have an excess of refinery capacity in the world; we've been bringing on a lot in recent years, particularly in the Middle East, then subsequently also simultaneously in China. You've got your West African Dangote refinery that came on — interestingly, West Africa is still importing a million barrels a day of products or thereabouts. So you're seeing Dangote export and import, which of course we on the product side love. As Europe, more simple refineries get squeezed — as long as, and we're not seeing, we're seeing pretty steady product demand in Europe — so as some of those refineries close, which is projected for 2025, you need the imports. On the product side, yes, refinery margin is being squeezed, it's not super because we want them blowing and going, right, that pulls barrels. But still, when you get pressure and then the older, less efficient refineries suffer and close, and maybe retool over time, you need to bring in those products, and that's what we're there for.
Okay, thank you. Then a bit more focused on what's been going on — and Robert, you mentioned it a bit — latest fixtures look to be improving, so things are starting to happen. We had you on a roadshow with a few investors as well, Michael, and I think they all came out of that rather bullish and said you were the same. So what have you been seeing recently, and what makes you optimistic for the near-term prospect?
That was also our feeling — we were kind of being put a bit in the optimistic box versus many others. I think, to be honest, one of the reasons is we try to look a little bit beyond sentiment alone. I don't think it's my function to focus too much on all of these short-term issues. We look at seasonality and, as you say, fundamental demand and supply. What we've seen over the last two weeks is that, as Lois alluded to and Carlos as well, we lost ton-mile for the reason we talked about — lots of our ships have been doing shorter voyages, so you haven't gotten them out of the area. You load, discharge, and you quickly back again. What we've seen the last two weeks is that the arbitrage is widening very quickly for freight from east to west. So we see that the arbitrage and the allowance for payment of freight is going up dramatically as we speak, indicating that the trend towards the winter, which for us is dominated by two things — more cargo loadings, more products on board ships. We look at our measurement for the last few weeks, it's pretty clear now that loadings are increasing on ships, which normally will lead to further ton-mile. So we think we're in the beginning of seeing a market rebound for the reasons that there's more cargo flow, there's better arbitrage, there's higher freight rates now being able to be paid for east-west voyages. That is exactly what we want — that is what we've been lacking is the longer voyages, as explained before, of middle distillates. We're certainly seeing the first signs of all these things pointing the right direction.
How do you disbelieve someone who's sitting with a beautiful rosy lighting background and almost looks, with his white hair, as if he has a halo on his head, right? What can I add to that in terms of credibility? But look, I agree with Michael. You've got some little signs now — your major desks, for example, on the MRs in the Gulf, are trying to stay short. They're very confident now that the market will move up in the long rather than fix away long in a short market. You're starting to have big rate volatility. You had one void in the handies that was $35,000 a day eight days ago, fell to $15,000 five days ago, and now it's back at $35,000. Whenever you see volatility starting to come into a market, you know that you're close to a breakout. If it's in a weak market, it's a breakout to the upside; in a strong market, a break down. You're seeing that point that others have made — that east-to-west leg on the LR2s will pull so much away and get things moving that the others can just fall into that gap.
And then nature will do the rest, as it always does. This time of year — is the explanation for the pickup post-Thanksgiving really just winter in the Northern Hemisphere, or what's the background?
A whole host of things. Some people don't want to have longer-term, longer voyages that will deliver products during the year, so some people wait because they don't want to have products for inventory or tax reasons, or use of capital reasons in the traders. It's always a very unusual time. This year it's been compounded, I think, through the election, where there was — I mean, Biden was trying to do what he could to keep oil prices, product prices down. The uncertainty in the market — who's going to win, what will happen — so there was a risk-off in all markets going into the election. And just simply — and then this refinery issue with the Arabian Gulf refiners doing their maintenance early.
The reason I'm asking is because a lot of people have expected seasonality in tankers this year, and people are a bit tired of seeing it not pick up. So there's still hope for the product side, I guess.
Honestly, they must be very young, or very new to shipping, or both. Because it really is — the normal distribution is one week before, one week after, and it's definitely picking up. As all of us — if you look behind the curtain, if the companies here, if we were sitting in a bar, we'd be going, 'Oh my God, what is the nonsense — this is not a weak market. We're making loads of money.' And what a great rate — the rates that Lois is talking about in her MRs is a fantastic base. You have to turn the glass over. It is incredible, with all that's been thrown at the market, that the market is still this strong. The VLCC change with the crude, the refineries coming early, the waiting for the traders — I mean, wow, it should be lower than this, way much lower. This is great. So as soon as that demand happens and you clear it, the rates are going to spring upward.
Okay, good. Then Carlos, let's turn a bit to the presidency if we can. In the US, where you have Trump inbound and probably stricter sanctions on Iran, maybe resolution at some point in Russia — a lot of geopolitical events have really driven up the tanker markets, I think it's fair to say. How do you feel we stand, and what do you expect when we get to January next year?
On this particular issue that you refer to, Iran — when Trump was last president, the enforcement of sanctions against the country was very strict, and the country exported very little oil, around 0.3 million barrels per day at the end of his presidency. What we have seen is a gradual ramp-up in exports over the last few years. This year it has reached around 1.7 million barrels per day, from I believe 1.3 last year in terms of exports. So there's a lot of room for these exports to be curtailed in the future through stricter enforcement of the sanctions, which would mean that the lost barrels from Iran would have to be compensated with greater exports from other countries, which would be transported on compliant vessels. So it would be very positive for tankers in general — possibly more for the crude tankers, but indirectly also for us, for the product tankers.
In that respect, I think that the Trump presidency could be very good. But in any case, what we are seeing is, apart from Trump, on the sanctions issue, much stricter enforcement by other countries too. Recently we have seen the UK and the EU, but also the US already prior to Trump, targeting more specifically vessels, sanctioning them and making it very hard for them to continue trading. When you look at the shadow fleet today, which it's possibly around 670 vessels which are engaged regularly on such trades, you already have over one quarter which are explicitly sanctioned and growing very fast over the last few weeks. So it's probably actually much more than one quarter by now. If this trend continues, this also could be very positive for the tanker sector generally.
Can I ask you — do the Chinese care, or are they cautious to import this type of illicit oil in any way? Is that something that's changing, or will this be allowed to continue even though they're sanctioned? Let's say they go in a very particular trade out of Iran or Russia and towards India or China, which has been going on for a while. Is that something that you believe will change now that the actual sanctions are in place and we perhaps see more will to enforce this from the West? Or does that help in regards to Trump coming in? I'll leave that open to the floor — I don't know if anyone...
It's a really important subject. Whatever you see and feel and hear, I think is of great importance. I was wondering whether that was going to be a title of a song — 'Do the Chinese Care' — a little bit like the wonderful Sting song about 'The Russians Love Their Children Too.' They haven't cared historically. But there's this point that was pointed out — that didn't stop the fact that they didn't care in the previous Trump administration; it didn't stop the position that Iran was really cut back from its exports. To expand that further, Trump could be interestingly very positive. So let's say you have peace in Ukraine and Russia — it's then in Trump's interests to not just try and get the political gain in the US for making a peace and stopping the US spending lots of money, but also he's going to benefit from the economic position where I don't think Europe is going to turn around to Russia and immediately say, 'Oh yeah, everything's forgiven, and Germany start taking in gas again like no tomorrow.' The more likely thing is that Trump is going to sit down and say, 'Guys, look, you still need my protection. Now you are going to take in my gas and my oil.' So I see energy moving from the US or the Americas towards Europe — so that's one positive for Trump. The second thing is that Iran tried to kill the guy, and the FBI, CIA confirmed that that's what they were trying to do. So I think he's going to go for it big time in Iran. Then you have Israel — Netanyahu is top of the chart since he started to become aggressive in the situation. Why on Earth would he leave Iran where it is to carry on building their nuclear position? Now, I'm not saying it would happen, but the chances certainly increase that real pressure, in the form of military pressure, would be on Iran.
Robert, if you build off of what you're saying, even the current Biden administration — we're seeing it coming out every day. Now 35 entities over the last week have been additionally sanctioned, so you're seeing specific vessels. All of a sudden, even the Biden administration is ramping this up. All of us being at the tanker parties in Dubai and in Riyadh in the last few weeks, a lot of positive sentiment among the Saudis on Trump coming into play. As the pressure ratchets up, more Saudi barrels can come out on proper tonnage.
I think that's a fair point. I think because you have several parts of that geopolitical situation which could impact tankers. The first one, as was mentioned, I think is a lot down to the crude tankers — which I can ask you, Lois, but I guess it would be in the affirmative — but it's clearly very important that you get the missing piece in place in the tanker spectrum, which has been the VLCC side. VLCCs have been weak, which spreads across the entire sector, I would argue. If you bring back the AFRAMAX piece, those weren't all vessels that were sanctioned — there's a bunch of Aframaxes on there because Aframax are choice ships coming out of the Baltic. That dovetails with the LR2s, and all these guys on the call that had their LR2s — if you take out some of those Aframaxes that are quite aged, that's an old fleet, which only creates some positives on the LR2 side. But then you have the aim of sanctioning Iran tougher than has been the case up until now, which would also be getting an end to some of the unrest in the Middle East. The next step to that question would be: okay, what happens if the Red Sea reopens, which could be the end game here? Michael, would you like to take a stab on that one — how much of an impact would that have on the product tankers?
Obviously, if there is an end to the Red Sea crisis — and just remember, that's a long way from ending and having peace negotiations to actually having a safe passage. Even with what's going on now and debates going on, I still think we are far away from us feeling comfortable sending ships and our colleagues off through the Red Sea. But if we look at where we were before the Red Sea crisis and we looked at the earnings and the ton-mile increase, we were probably looking at something like a 20% difference in freight earnings from where we were. Before the market was pretty high — we were doing close to $30,000 at the time and it probably went to like $36,000, just taking some aid numbers. So for sure, yes, if you remove ton-mile, that's always going to have an effect on the market in a negative direction. But we're not talking about collapse, because we were already having a pretty strong fundamental market. When you talk about all these geopolitical issues including Ukraine, Russia as well — of course things will get solved, we all know that. But the interesting part for us is that the Russia-Ukraine situation, if you live in Europe, I think it's pretty evident that you will never go back to where you were. So we're not going to a situation where you're going to have short-term voyages from Russia to Europe replacing the trading patterns we're seeing today. Nobody believes that, even in a time of peace, you will not go
back to be depending on Russian oil the way it was before, so we don't think that you're going to be losing from that political crisis a lot of ton mile. But fundamentally the interesting part here is, as Carlos said, there are 700 ships roughly in the tankers that are part of that dark gray fleet. And in a situation where things kind of fall back, those ships are going to disappear. And even with the current order book we have today, I have to say that everything falls away. The reality is we have a lot of ships that we have to go and get scrapped. And we've seen the quality close up on some of that fleet, and I can say these are not ships that are being maintained, these are not ships that people are spending money on. I mean these are ships that will have a very limited chance of trading in any form of normal global trade going forward.
I agree, the average age has just skyrocketed as well, so I guess that says it all. But I agree with you Michael, but let's say I want to disagree and say why would not the product flows return to normality? You can say post that situation in Ukraine, let's say everything's resolved and people sign a peace treaty or whatever, and then you know it's a bit tough for Europe then saying that they disagree with the peace treaty because that would be hard to get things over the finish line. I would argue that you've proven now that you're not dependent on Russian energy because you've now shown the flexibility in the shipping fleet. So why would you be afraid to take the cheapest available energy for a while when you've shown that you are pretty robust in terms of sourcing?
Yeah, I mean I can just have one quick response and let the others come in as well. But obviously that's what's going to happen as well, so obviously there'll be a mix. What I said is Europe is not going to be depending as we were before. We have to remember the distance here. I mean if you're depending on short-term distance of transportation and that goes wrong, there's a pretty long way for replacing that, and the energy crisis we saw in Europe on the gas side was exactly part of it. So sure, there'll be a mix of it. I think my view was more that you're not going to roll back to where we were, which was to a big extent a very big dependency on Russian oil moving from the Baltic into Europe. So sure, there'll be a mix of it. I do agree.
To the other, I also think just very quickly I would add to the point that I agree that you'll still have some trade, but the difficulty is the actual ships. So you're not going to go Russia to the UK for BP with an old ship, you sure as aren't going with an old ship that hasn't got all its certificates, etc.
So yeah, it's going to get, if I might, it's going to get super interesting. Because we always live and learn. One place where Trump was not wrong is because we sat down with a NATO, one of the top generals there, and it was true that there was like single digits of the NATO countries actually putting up their GDP and preparing themselves. And you can bet that even though now probably because he made a large kerfuffle the first time he was in, that there are now the majority of the countries are contributing their GDP and cranking their effort up. And this is all going to evolve, but that really focuses yourself when you know you have to take your country and devote more of your resources to your defense, it sort of focuses the mindset. And all of that dovetails through. So if you're going to have to do that, and then it doesn't look like there's going to be a clear winner, not that there's ever any winner when you have this kind of mass casualties, but this is going to take time to play out and be very... yes.
Okay, good. And then on the final part with Trump and tariffs and whatnot, I got a question from an investor actually on the implications for product tankers from a stricter tariff regime against Canada and Mexico. Is that something that you've given any thought to? Whoever wants to answer, what are the implications for product tankers from that type of a scenario?
I would say, I mean, if these tariffs are implemented, and I believe it's more of a negotiating tactic which he has used often in the past, and he might implement them gradually. If so, he might try to obtain other concessions from these countries rather than implement such tariffs. But it is not a given that oil will be included in the tariffs. There might be an exclusion for oil for obvious reasons. I mean I think that one of the biggest concerns and probably one of the main reasons why Trump was elected was the effects of inflation in the US economy. And of course, big tariffs on Canadian oil, of which the US I believe imports around 60% of Canada's oil, would have serious economic repercussions. So but if it were implemented, at least some of that oil would find another home possibly, and instead of being transported through pipelines to the US, will be transported through ships to more distant locations. So if you're putting tariffs especially on close trading partners, you create inefficiencies, and shipping loves inefficiency. And then the US would have to replace the oil from Canada through imports from other more distant locations. So in that sense I think it could be positive for the tanker sector.
