Freight rates hit an 18-year high! Will Chinese shipyards be the big winners in this ship type again?

Freight rates surged to their highest since January 2016, with new ship orders increasing fivefold, exceeding the total orders for 2023. Crude oil tankers, led by VLCCs, are becoming the rising "star" ship type in the global market this year.

The Baltic International Maritime Council (BIMCO) recently released a report stating that in the first two months of 2024, aided by increased VLCC orders, new crude oil tanker orders surged to 7.4 million deadweight tons, a year-on-year increase of 490%. Among them, VLCC new ship orders totaled 19, exceeding the total orders for the whole of 2023.

Meanwhile, Clarkson's data shows that in the first two months of 2024, global crude oil tanker new ship orders totaled 29, including 19 VLCC orders with 5.905 million deadweight tons, accounting for over 80% of the total global crude oil tanker orders this year; in addition, there were 8 Suezmax crude oil tanker orders with 1.24 million deadweight tons, and 2 Aframax crude oil tanker orders with 0.23 million deadweight tons.

In terms of shipyards, 78.9% of VLCC new orders this year were undertaken by Chinese shipyards, including 4 traditional fuel VLCCs and 4 LNG dual-fuel VLCCs from Dalian Shipbuilding Industry, 2 traditional fuel VLCCs from Dalian Shipbuilding, 2 traditional fuel VLCCs from New HanTong Shipbuilding Heavy Industry, 2 dual-fuel VLCCs from New Times Shipbuilding, 1 traditional fuel VLCC from Qingdao Beihai Shipbuilding, and 2 traditional fuel VLCCs each from Hyundai Mipo Dockyard and Hanwha Ocean (formerly Daewoo Shipbuilding & Marine Engineering) in South Korea.

In the Suezmax tanker sector, South Korean shipbuilders received orders for 5 traditional fuel vessels, including 2 from Hyundai Mipo Dockyard and 3 from DH Shipbuilding (formerly Daewoo Shipbuilding & Marine Engineering), while Zhoushan COSCO Heavy Industry received orders for another 3 LNG dual-fuel vessels. The remaining 2 Aframax crude oil tankers were all received by Yangzijiang Shipbuilding.

The BIMCO report points out that crude oil tanker freight rates have soared since the outbreak of the Russo-Ukrainian War and remain strong in the first two months of this year. The Baltic Dirty Tanker Index (BDTI) average was slightly higher than in the first two months of 2023, setting a record high for January and February averages since 2006. VLCCs were the strongest performers at the start of the year.

Data shows that the BDTI index VLCC TCE averaged $41,458 per day in January this year and increased to $47,332 per day in February. This level far exceeds the average of $15,097 per day in January last year and $25,507 per day in February last year, and is also higher than the average of $23,405 per day in December last year.

The report states that in March 2023, the backlog of crude oil tankers accounted for only 3.3% of the existing fleet, the lowest since at least 1996. With the rapid increase in Suezmax tanker orders in 2023, VLCC orders also increased, and by February this year, the backlog of crude oil tankers accounted for 6.2% of the fleet.

Although VLCC new ship orders have rebounded strongly, the current backlog accounts for only 4.3% of the existing fleet.

BIMCO believes that the short-term outlook for crude oil tankers is optimistic. Due to slow fleet growth and longer sailing distances, the supply-demand balance may tighten. This outlook seems particularly favorable for VLCCs and may support freight rates in this segment.

As the largest crude oil tankers, VLCCs are typically used to transport crude oil from the Middle East and the Americas to Asia. In the coming years, BIMCO expects more oil to come from the Americas, and oil demand will increasingly shift towards Asia. This will not only increase sailing distances but also benefit VLCCs in particular, as these vessels already dominate these trade routes.

70% of the crude oil tankers ordered in 2023 and all crude oil tankers ordered so far this year will be delivered between 2026 and 2027. Therefore, the continued low growth of the crude oil tanker fleet before then will support freight rates. Even after 2026, the risk of oversupply currently seems small, although new orders have increased, the existing backlog remains at historically low levels. However, new vessels delivered in 2026 and 2027 may further increase.

Despite the positive medium-term outlook, the International Energy Agency (IEA) currently predicts that global oil demand may peak in 2030. However, since the outbreak of the Russo-Ukrainian War, the restructuring of global trade routes has increased the demand for vessels, and at least some of the aging fleet needs to be updated. Against this backdrop, BIMCO expects that the volume of crude oil tanker orders is likely to increase further in the second half of this year.