Rising asset values and a new financial situation
Tanker shipping never ceases to fascinate. Although a recovery has long been predicted, we can only marvel at the change of scene that has taken place so far in 2022. Fundamentals were positive at the start of the year but earnings were at rock bottom – today the freight market is strong, Concordia’s asset values are high and the near-term outlook is good.
IN THE THIRD QUARTER, the strong product tanker market development that started in April continued. Average earnings per day for an MR vessel on the spot market1) rose from USD 27,600 in Q2 to USD 35,200 in Q3. The trend was the same for the time charter market. A one-year time charter rose from about USD 17,000 per day to USD 24,100 per day and a three-year time charter charter from USD 14,100 per day to USD 16,800 per day.
The strengthening of the tanker market has also pushed asset values of vessels upwards and vessel turnover has been high, particularly for older tonnage. The estimated market value for a new MR vessel, direct from the shipyard, increased by 12% from about USD 40.1 million in Q2 to USD 44.8 million in Q3, while a 10-year-old vessel increased by 23% from about USD 22.1 million to USD 27.1 million.
This trend is largely due to the changes in cargo flows brought about by the Russian invasion of Ukraine. Russian oil is increasingly finding buyers in Asia, while Europe in particular is replacing its Russian imports with oil from the Middle East, West Africa and the US. On the product side, high demand and strained refinery capacity have led to increased volumes being transported longer distances.
National strategic oil stocks can be considered a buffer in the event of increased demand and oil stocks are currently very low. The US has continued to use its SPR (Strategic Petroleum Reserve). At the same time, OPEC+, despite its decisions to reduce production, has struggled to meet production targets. With continued sanctions and uncertain economic growth, particularly in China, this could contribute to continued volatility in both demand and prices of oil and energy – and, by extension, prices of tanker transport.
Looking at the supply side, the order book for tankers remains low, which is expected to bring low net growth going forward. Another contributory factor is the continued phasing-out of older tonnage. In the MR segment, net growth for 2023 is expected to fall to 2–3%2), which is lower than in 2022. A number of orders placed for expensive container ships could possibly be renegotiated to tankers in the longer term, but in that case the impact would only be marginal.
Concordia Maritime’s result for Q3 was SEK –22.8 (–141.4) million. The improvement in results compared with the corresponding quarter in the previous year is an effect of the time charters that have been entered into and a stronger market. The main reason why the result is still negative is that the average agreed base rent (USD 15,500/day) is not sufficient to make an accounting profit. Another factor is that many of the freight agreements Stena Bulk has concluded for the vessels have generated limited profit-sharing so far. This is because they are mainly time charters, which have a lag in relation to the faster development of the spot market. The five-year agreement with Stena Bulk secures a base rate and profit-sharing for any surplus levels, calculated on the basis of average earnings per vessel per half-year. It is obviously sad that the charter agreement that was so important for the Company’s future in autumn 2021 is now limiting our upside, but such is the industry. The Company has also faced rising interest expenses during the quarter.
New financial situation and reduced debt through vessel sales
During the quarter, our oldest vessel Stena Paris was delivered to her new owner. The contract was signed in June and, after some delays, she left the fleet in September.
During the quarter, the Company took advantage of the strong market and signed contracts for the sale of three other older vessels, Stena Primorsk, Stena Performance and Stena Provence, all built in 2006. Two of the vessels are expected to be delivered to their new owner in December, and the third in January. Overall, the sale is expected to generate a liquidity surplus of approximately USD 30 million, which will be used for accelerated loan amortisation.
Following the sales of the vessels mentioned above, the Company estimates that total interest-bearing liabilities will have fallen by approximately USD 55 million.
A company in transition
Concordia Maritime is a company in transition. We are significantly more slimmed down than at the beginning of the year, but we are also a much stronger company financially. This journey has been necessary. The process of evaluating our next step now continues. Shipping is cyclical and timing is important in all transactions, whether buying or selling. For the benefit of our shareholders, we keep an open mind to the business opportunities that exist.
Monthly market reports
The world has been characterised by great drama so far this year, and so has the tanker market. Inflation, rising interest rates and geopolitical instability are affecting individuals and shipping. To reflect developments and their significance for tanker shipping, we publish a market report at the beginning of each month. Keep an eye out for them here on concordiamaritime.com.
Göteborg i november 2022
Erik Lewenhaupt, vd
1 Earnings for a 47,000 deadweight product tanker built after 2010, without scrubbers and of “non-eco” design. An average of earnings on the Baltic Exchange’s TC2, TC14, TC10, TC11 and TC12 index routes. Source: Howe Robinson Partners.
2 BRS Tanker Monthly October 2022.