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VLCCs, Place your bets!

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In 2018 so far, some 17 VLCCs have been ordered, which has expanded the orderbook by 17.0% in terms of vessel numbers, according to Alibra data. Of these ships, all but two are to be built at South Korean yards. One has been ordered in China and another in Japan.

Almost 80.0% of the overall VLCC orderbook is scheduled to arrive this year and next, which could pose a problem if charter markets do not improve dramatically in the short term.

VLCC earnings have, generally speaking, been on a downward trajectory since last year, although in the past two months much sharper falls in spot rates have been observed on MEG-US Gulf routes than those for MEGJapan as the US ramps up increased domestic production (and exports).

The period market, meanwhile, has held steady. One-year timecharter rates are currently hovering at around the $22,000/day level, which is around $5,000/day less than what was being achieved this time last year.

By looking at newbuilding prices reported in 2018 so far, it would seem that low prices are tempting owners back to builders. In March, Kuwait Oil Tanker Co reportedly signed a one-vessel contract at China’s Bohai Shipbuilding for just $79.7m.

In South Korea, VLCC contracts have been going for around $87.0m since 2018 began. In contrast, three years ago China-built VLCCs were contracting at prices of close to $94.0m per vessel.

While newbuildings have been getting cheaper during the past two years, secondhand prices have remained more or less flat. The Baltic Exchange’s five-year-old VLCC
(310,000 dwt) benchmark has been valued at around the $64.0m mark since June 2016 with only slight fluctuations. With the price differential between new and nearly-new ships having closed so rapidly in the intervening period, what better reason to say “to hell with it” and see what bargains shipbuilders can offer?

Add to this the influx of “other people’s money” into shipping again. Funds have reportedly renewed their interest in investing in shipping, putting their money behind speculative asset plays and helping to fuel the VLCC newbuilding spree seen this year to date.

Private equity previously had its fingers burned by shipping when it entered the space en masse from 2013 onwards. Let’s hope things are better this time around.

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