As the Middle East war enters its fourth week, a shortage of very large crude carriers (VLCCs) fueled by maritime logistics disruptions is spilling over into a rally of orders for Suezmax crude carriers, one class down. With tankers already in short supply and VLCCs snapped up, shipowners in a hurry are rushing to secure substitutes. As this replacement demand turns into newbuild orders, Daehan Shipbuilding, which specializes in Suezmaxes, is benefiting.
Crude carriers are classified by size. The largest, the VLCC, is a 300,000-ton vessel that can carry 2 million barrels of crude at once. 2 million barrels is equivalent to Korea's daily oil consumption. A Suezmax is a 150,000-ton vessel, about half the size of a VLCC, and the largest ship that can pass the Suez Canal fully laden.
◇ Supply drought compounded by war… orderbook at highest in 14 years
According to Clarksons Research on the 28th, the global Suezmax newbuild orderbook has recently surged to 25% of the existing operating fleet. In effect, for every four Suezmax vessels in operation worldwide, orders for one more are on shipyards' books. This is the highest ratio among all tankers that carry liquids such as crude and, for Suezmaxes, a record high in 14 years.
A prolonged supply drought in the tanker market, with war as the spark, has ignited demand for Suezmaxes. Of the 689 Suezmax vessels worldwide, 273, or 40%, are over 15 years old. Among global oil majors including ExxonMobil, BP and Total, it has become customary not to approve cargoes on ships older than 15 years. As a result, these vessels have effectively been pushed off major routes.
On top of that, so-called shadow ships (dark fleet) evading Russia and Iran sanctions number as many as 116 within the Suezmax fleet alone. Their average age is 21.8 years, also aging. In this situation, the Strait of Hormuz has been effectively shut for the past three weeks due to the war, stranding crude carriers in nearby waters. Even the available ships are taking detours instead of traditional routes, lengthening voyage distances.
Ultimately, while tankers grew scarcer, charter demand to move crude spiked and charter rates have become name-your-price. Recently, VLCC daily charter rates climbed to $800,000 (about 12 billion won). As shipowners in a hurry scrambled to amass VLCCs, which carry the most crude per voyage and offer high transport efficiency, available tonnage in the market dried up, and demand is spreading like wildfire to Suezmax crude carriers.
◇ Sinokor Merchant Marine and MSC sweep up VLCCs, pushing Suezmaxes as an alternative
The one who lit the fuse was Sinokor Merchant Marine. As crude carrier demand eased after COVID-19, Sinokor Merchant Marine anticipated demand from tanker aging and began snapping up secondhand ships starting in 2022. Since late last year, it has ramped up the buying spree in partnership with the world's largest shipping line, MSC. The VLCCs they have secured are said to number up to 150. That amounts to sweeping up about a quarter of the major global tanker fleets. With market tonnage dried up and the Strait of Hormuz blockade making VLCCs as hard to get as stars in the sky, shipowners began turning their eyes to smaller Suezmaxes.
An industry source said, "From a shipowner's perspective, securing VLCCs that carry large volumes at once is optimal, but secondhand ships have already vanished, and even if you place a newbuild order, you have to wait three years," adding, "By operating two Suezmaxes, you can handle a volume similar to one VLCC, so they are emerging as a practical alternative." There is also talk that demand could heat up further as MSC, after stockpiling VLCCs with Sinokor Merchant Marine, is reportedly weighing entry into the Suezmax crude carrier market.
◇ Daehan Shipbuilding rides the Suezmax "order rally," with prices at a record high
In Korea, mid-sized shipbuilder Daehan Shipbuilding is cited as a prime beneficiary of this trend. Daehan Shipbuilding won orders for six Suezmax crude carriers in January, two in February, and then secured back-to-back contracts on Mar. 16 and 20. Of the 41 Suezmaxes ordered worldwide this year, Daehan Shipbuilding captured about a quarter. The company now has an order backlog of 34 ships, including 28 Suezmaxes, securing about three years and six months of work.
The Suezmax prices Daehan Shipbuilding secured also hit a record high. The Suezmax newbuild price, which was $85 million per ship at the end of September last year (about 119.2 billion won at the exchange rate then), has recently jumped to $89.5 million (about 133.0 billion won). A Daehan Shipbuilding official said, "Amid supply chain uncertainty, shipowners are moving to secure reliable ships first," adding, "Due to logistics changes stemming from the Middle East, demand for crude carriers including Suezmaxes is expected to increase for some time."
The market sees this ripple effect as unlikely to stop at Suezmax crude carriers. That's because for Aframaxes, which are 100,000 tons and smaller than Suezmaxes, 48% of the fleet is over 15 years old, creating robust replacement demand amid limited supply.