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Funding changes set to change the tanker landscape, says Euronav's Rodgers

07 April 2017 IHS Markit Maritime & Trade Expert

This story originally published on

The landscape of tanker shipping is poised to change in the years to come as financing will continue to undergo a far-reaching change, said Paddy Rodgers, CEO of Euronav, the Antwerp-based listed Very large crude carrier (VLCC) and Suezmax owner.

Funding has been the key driver behind the cycles in tanker shipping, which is now experiencing a period of depressed earnings following a boom in ordering of newbuildings a couple of years ago. "The oversupply of funding to tanker owners in the 1970s resulted in a crisis with oversupply of tonnage that lasted well into the 1980s," Rodgers pointed out.

The new Basel III and IV rules that followed in the wake of the crash of the financial markets in 2008 mean that banks will have to review the practices of their asset-based finance. In practice, in the case of shipping, this will mean that less funding will be available in the future, Rodgers said.

The Bank of International Settlements says on its website that Basel III rules that were introduced between 2010 and 2014 aim at improving the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source, improve risk management and governance and to strengthen the banks' transparency and disclosure.

Basel IV, meanwhile, covers the capital requirements for banks and the rules are still be to be implemented, according to an article on Furthermore, in Germany, lending to shipping through leasing schemes and Landesbanks has also run into deep problems, which will contribute to the changing situation for shipping.

"I think the boom and bust cyclicality could change in the future, but not the volatility and seasonality," Rodgers told Fairplay.

Major tanker companies that are professionally managed will have access to funding, while small, privately owned companies will find this increasingly difficult. "High-quality organisations will deliver more consistent returns to meet the expectations of the financial markets," Rodgers said.

As far as privately owned smaller companies are concerned, he noted that tanker shipping has only been profitable for them as a result of the availability of 85% to 90% leverage. However, this situation is to change and wealthy individuals may feel more attracted to invest in sectors where the returns are deemed to be more consistent, such as real estate and art.

The two- to three-year cycles of boom and bust have ultimately been the result of excess funding that has been available to shipping. With the taps now closing to several participants of the tanker shipping sphere, this scenario is on its way out. However, from that it does not follow that spot freight rates would be confined to a narrow range for extended periods.

Volatility of the rates will remain part of the industry, as this is triggered by the availability of tonnage in key loading areas, such as the Gulf. Seasonality will also remain part of the picture: the demand for crude oil grows ahead of the winter season in the northern hemisphere and during it.

The long-term outlook in the oil and tanker industries has raised some concerns at certain quarters. OPEC has, perhaps unsurprisingly, taken a positive note and the organisation expects to supply 37% of the world's demand for oil in 25 years' time.

By contrast, Danish Ship Finance, the Copenhagen-based shipping bank, has taken a cautious long- term view. The bank's research teams stated in a report in December 2016 that the global tanker industry has been driven by excess crude oil production, resulting in a 3.3% increase in tonne miles in the first half of 2016.

"In general, domestic consumption of fossil fuels usually peaks at the point where the industry sector (as opposed to the service sector) contributes the most to domestic GDP creation. In all major economies, we are seeing an increased contribution from the service sector to GDP creation," the bank said.

"This implies that the oil intensity of GDP is declining, although the 2015 figure was abnormally high due to the low oil price. We expect the oil intensity of global growth to continue to decline and the underlying efficiency gains to return to more normal levels, averaging approximately 4% per annum in the period to 2021," the bank's research team concluded.

Rodgers noted that given the information we have at this moment, oil will retain its position for quite a while and a peak in demand is likely to occur in 2035 to 2040. Renewable energy sources are likely to be utilised to the highest degree in developed countries first.

The economic landscape of the world is changing as well, a fact that was highlighted in a report of PWC, the business consultancy, called World 2050. Its key message was that demographics would act as the key driver of the global economy: countries and regions with a growing workforce would gain importance in comparison to those, where the situation is the reverse.

"Steady growth in China, India, Latin America, and Africa would help the (tanker) business," Rodgers noted, adding that ultimately the question is to what extent the incremental demand growth in oil in a given region is covered by shipping and which by pipelines.

Euronav, which currently has a fleet of 55 ships, has acted as a consolidator of the industry and it is the management's intention to remain on this path. "We have acquired 25 VLCCs in the last couple of years," Rodgers noted. However, consolidation also entails commercial operations and Euronav is a member of the Tankers International pool that operates 36 VLCCs. Last year the company established Suezmax Chartering to co-ordinate spot fixtures.

"In the next five years, we can see value in consolidation, including commercial. It's got to be at the right time and at the right price," Rodgers noted.

Early in the year, Frontline launched a bid to acquire DHT Holdings, another listed tanker company, but the target company rejected the offer and the situation remains in stalemate, whereby Frontline controls about 16% of the shares in DHT.

"We think that the merger of DHT and Frontline would make perfect sense as it would mean a step towards larger entities," Rodgers said. However, he added that the question of valuation of DHT that remains open and forms a key obstacle for the deal is a matter for the boards of the companies concerned to discuss and he has no view on that.

"We think a major test in the future will be what is happening at yards," he continued. The Chinese shipbuilding industry in particular expended significantly before the financial crisis and in the new normal that has followed it, there is substantial excess capacity. "We expect the capacity to shrink, but this should be done so that it will not have a disruptive effect. This is going to be very important," he stated.

Regulation will also remain on the table in the years to come and Rodgers said he welcomed that on one condition: it should universally applied and enforced. "It has increased efficiency and been nothing but positive: it has increased professionalism and it discourages opportunism so that only the bigger and stronger players can thrive," he said.



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