A particularly challenging year
Twelve months ago, we looked back on a mediocre 2020. The prospects for a recovery in 2021 seemed good at that time. Stock levels were low and demand for oil increased again – after the sharp decline early on in the pandemic. A year on, we can see that the upturn failed to materialise. Instead, 2021 turned out to be one of tanker shipping’s most challenging years ever.
All other shipping segments apart from the tanker segment showed strong growth during the year – largely driven by high commodity prices, disruptions in logistics chains and a generally strong and rapid recovery in the world economy. The Clarksons ClarkSea Index, which shows overall earnings for shipping, increased by 93 percent during the year. At the same time, the tanker segment’s share of the same index fell by 71 percent.
Several reasons behind the weak market
The tanker markets were under strong pressure throughout the year. Average earnings per day for a Suezmax vessel during the year fluctuated between USD 2,500 and 12,500. Corresponding earnings per day for an MR product tanker were USD 3,500–13,000. We could see some recovery in the fourth quarter, but nothing that would change the big picture.
The weak market during the year was due to a number of factors, the main ones being:
- Lower volumes. Despite a recovery in demand for oil, production and export volumes have not increased at the same pace as OPEC has been holding back. Stock levels reached historically low levels in the second half of the year and the broad replenishment has not yet taken place.
- Shorter distances. This is partly due to lower than expected exports from typical long-distance exporters like Russia, Brazil, the US and Norway to regions such as Asia, leading to a reduction in transport distances.
- Less phasing-out/recycling than expected. Despite a historically weak market, a relatively large number of older vessels remained active. Some of these are reported to be sailing with cargo from sanctioned countries, instead of going in for recycling. This contributed to net fleet growth.
- Increased fuel prices. The price of crude oil rose gradually over the year, from approximately USD 50 per barrel in January to approximately USD 80 per barrel in December. This affected fuel prices for the fleet.
Major impact on Concordia Maritime
The continuing market weakness is clearly reflected in Concordia Maritime’s financial result for the full year 2021, which amounted to SEK –660.4 million. In addition to generally weak earnings, other contributory factors were non- recurring costs related to periodic drydocking, installation of statutory ballast water treatment systems and increased complexity in crew changes as a result of the pandemic.
The weak market also resulted in a decline in vessel values for older tonnage, which – as previously communicated – affected the book value of the fleet and the result. The result for the fourth quarter, which was affected by the impairment, amounted to SEK –307.8 million. The stronger earnings during Q4 are mainly a consequence of the five-year time charter for the P-MAX fleet. Although the base rate does not generate a profit, the agreement provides the necessary basic cover during challenging circumstances and there is the possibility of profit-sharing with Stena Bulk for any income above the base rate.
Measures to strengthen the Company’s financial position and liquidity
A number of activities have been initiated to strengthen the Company’s financial position and liquidity:
- Chartering out the entire P-MAX fleet (gradually from Q3 2021). The five-year time charter agreement with Stena Bulk secures a base rate of USD 15,500 per day and vessel with profit-sharing for any surplus levels.
- New financing, including a lower amortisation rate and new covenant levels (Q3 2021 – Q4 2024).
- Divestment of the two IMOIIMAX product tankers (Q3 2021).
- Redelivery of chartered Suezmax shares (Q3 and Q4 2021).
- Sale of P-MAX vessel Stena Perros (Q1 2022).
Is this the demise of the tanker market we are now witnessing? No, probably not. There is still an underlying need for transport. Crude oil, refined products, vegetable oils, renewable fuels and chemicals all need to be shipped. The tanker market is volatile in nature and when the market turns, it tends to do so quickly. The market weakness in recent years can probably be seen as the consequence of a number of unfortunate and interrelated causes.
Looking at the supply side, we can see that the order book for tankers is at 7.3 percent1) of the total fleet, which is historically low. At the same time, the average age of the fleet continues to rise.
We also note that many shipyards are full until mid-2024 as a result of the strong container market. So even if orders were to increase now, it would take several years before newly ordered ships could be delivered. Oil stock levels remain low – and we have to wonder how long this situation can persist.
A major focus during the year will be to gradually strengthen the Company’s liquidity and financial situation. The chartering out of the P-MAX vessels provides a necessary basis here. In addition, we are continuing to review the fleet, its employment and its earnings potential. One example is the technical design study that we recently launched. The aim is to investigate the feasibility of converting P-MAX vessels for container transportation (2,100 TEU). The road to a decision is certainly long, but given the market situation, no type of measure can be ruled out.
“Expect the best, plan for the worst and prepare to be surprised” are apt words for the tanker market. At the time of writing, the market situation remains tight but could change quickly. We are therefore keeping all options open for the future.
Finally, I would like to pay a special tribute to our crews, who have coped with a year of covid restrictions in an exemplary way.
Gothenburg, February 2022
Erik Lewenhaupt, CEO
1) Clarksons Total Tanker Orderbook