Suezmax deal is the highlight of the S&P market

‘Never right off John Fredriksen as a force in tanker shipping’ – that must be the main takeaway from the 14 Suezmax tanker deal that for many will solidify his position as deal maker of the year

The July and August 2019 sale and purchase market saw very firm interest in the Suezmax sector. The standout deal was John Fredriksen’s Frontline, which took on up to 14 Suezmax tankers from commodity trader Trafigura to lift its fleet to 30 vessels and take over the ’king of the Suezmax’ crown.

The names of the Suezmax tankers have not been released, but they are believed to include 10 ‘Marlin’ series built at Hyundai Heavy Industries (HHI) and Hyundai Samho in 2019. In addition, Frontline has options to acquire a further four Suezmax tankers from companies associated with Trafigura.

Adding the 14 Suezmax tankers to the 16 Suezmax tankers already in the Frontline fleet (with a live status and on order – source VesselsValue) increases the fleet to 30 vessels, overtaking Dynacom’s 29 Suezmax tankers.

Frontline is taking the initial 10 Suezmax tankers on time charter at US$23,000/day from what appears to be immediate effect until the closing date of the deal, which is expected between 15 November 2019 and 15 March 2020. Frontline has also agreed to charter back five of the vessels to Trafigura at US$28,400 with a 50% profit share above the base rate.

Frontline Management AS’ chief executive officer Robert Hvide Macleod said: “This transaction is backed by our strong belief in tanker market fundamentals and reflects our ability to act swiftly and decisively with the support of our largest shareholder. The structure of the transaction creates an immediate impact to our earnings at a time when we expect freight rates to increase significantly.”

Equally brave owners are to be found in the Suezmax orderbook; Enesel of Greece is reported to have paid US$62.1M each for four Suezmax tanker newbuilding contracts, specifying scrubbers and ballast water treatment systems for the vessels as part of the order.

What has prompted this flurry of activity in the Suezmax sector remain unclear is not clear, but in its Mid-Year Tanker Market Outlook Update McQuilling Services is positive about the Suezmax sector, projecting an average of WS 73 in 2020 for the benchmark TD20 trade, before expanding to WS93 by 2022. For a non-ECO Suezmax, McQuilling Services’ projections for spot market earnings over these years is US$10,800/day and US$27,300/day, respectively.

McQuilling Services comments that an ECO-design tanker will generally find significant advantages in 2020, due to the increased bunker costs. An ECO-tanker is projected to average US$17,300/day and US$33,000/day on the TD20 round-trip trade over this same period. Asset values are projected to firm in the sector, with McQuilling Services forecasting that in 2022, a modern five-year old Suezmax tanker will be worth an average of US$54.8M – a firm price increase from current pre-IMO 2020 levels.

Setting out its position very firmly regarding IMO 2020 and beyond was oil major Shell, which was behind an order for 10 LNG-powered Aframax tankers that had been ordered by Sinokor Merchant Marine. These are believed to be backed by charters from Shell. The vessels are due for delivery from 2021 from Samsung Heavy Industries and will be joined in 2021 by four LNG-powered product tankers, which Shell has agreed to charter from institutional investors advised by JP Morgan Asset Management. Shell had previously announced it has chartered in two LNG-powered Aframax tankers from AET.

Shell’s vice president for crude trading and supply, Mark Quartermain, said: “LNG is already a commercially competitive way to reduce emissions from ships, including those delivering oil to our customers. This is an important step in Shell’s wider drive to help decarbonise the shipping sector, both as a leading supplier and user of LNG.”

Shell’s vice president of shipping and maritime, Grahaeme Henderson said: “LNG is a cleaner-burning and lower-carbon fuel, so shipowners are increasingly using it to help achieve their environmental ambitions in a cost-effective way.” The reported en bloc cost of US$620M places the price at around US$62M per vessel, or approximately the same at the Enesel price reported for its scrubber- and BWM- specified Suezmax tankers.

Significant mergers

On the demolition side it was interesting to note that no Suezmax tankers were sold for scrapping in the two months in question, which given the above interest in the sector, it is likely to remain the case for some months to come.

In other sectors there was a notable new tanker order from Neste Shipping of Finland for two LR2 tankers from HHI. Neste Shipping only has one live tanker under its ownership, a three-year old Aframax tanker also built at Hyundai, but at one time the company owned and operated a substantial fleet of ice-class tankers. Some of the larger tankers were even built in Finland at yards that, at the time, had been purchased by the rapidly expanding STX shipyard group of South Korea.

The days of overseas expansion by South Korean shipyards are over and internal mergers will be a feature of 2020. Speaking to Tanker Shipping & Trade in South Korea, Hyundai Mipo Dockyard president and chief executive H D Shin said the proposed merger of South Korean shipbuilders Hyundai Heavy Industries (HHI) and Daewoo Shipbuilding and Marine Engineering (DSME) will have an immediate impact on research and speed up the development of new designs. He said the merger was progressing and a report would be issued later in the year.

The plan has been submitted to the local authorities and to international bodies that have expressed concern regarding the impact on competition in the shipbuilding sector. This includes authorities in China, Japan, the US and the EU.

“It is a step-by-step process,” said Mr Shin. “This is the joining together of the number one and number two shipyards in the world. These bodies need to be satisfied there will be fair competition.” DSME and HHI have a combined tanker orderbook of 118 tankers, with a capacity of 17M dwt.

In July the two largest Chinese shipbuilding groups, China State Shipbuilding Corporation (CSSC) and China Shipbuilding Industry Corporation (CSIC), announced their intention to merge. As it stands, CSSC/CSIC hold a combined tanker orderbook of 73 tankers with a capacity of 7.5M dwt. The impact on the tanker orderbook is less than the South Korean yard merger.

Like the HHI/DSME merger in South Korea, the Chinese merger is promoted as being beneficial to shipowners – offering lower prices from economies of scale in design, steel and equipment purchasing and financial strength. This is a comforting picture in the current shipbuilding cycle, but should demand increase, owners might find the lack of choice hampers design customisation and limits their ability to negotiate pricing.