Leading tanker operator Euronav is well positioned for the aftermath of the floating storage boom regardless of the pace of change in oil on water, with cyclicality an important feature of growth given the need for consolidation in the industry, CEO Hugo de Stoop told S&P Global Platts in an interview.
“The scenario of very high [freight] rates in the first two quarters and potentially lower rates in the next two doesn’t change the big picture and on average it is going to be a great year, no matter what happens in the third and fourth quarters,” he said, noting Euronav is structured to cope with any market.
“When it’s good, we are operationally leveraged and we make plenty of cash, when it’s bad we have a conservative balance sheet with not too much debt and we are looking out for opportunities,” the CEO of the Belgian tanker operator said, adding that he doesn’t expect demand for floating storage to continue.
“The curve is in contango but has flattened, which means the front of the curve people cannot pay for floating storage,” he said. A contango is a price structure that incentivizes storage since prices are higher further out than they are for immediate prices.
A collapse in demand and a spike in production led to a storage frenzy over the past couple of months, pushing freight rates for VLCCs beyond $200,000 a day. However, production shut-ins in the US and elsewhere, 10 million b/d in production cuts from OPEC and allies starting May 1 and easing lockdowns have eased concerns space would run out. With freight rates for VLCCs now down to a quarter of that value, the narrative has changed to how quickly stocks will be used up.
“If it’s very fast destocking, then obviously a lot of ships will return to the market quickly which wouldn’t be very positive, but at least it wouldn’t be very positive for a long period of time. If it’s slow then normally the market should be able to cope with it,” de Stoop said.
De Stoop said crude demand is coming back very strongly and that “it seems that demand is already back to more than 80 million b/d as the cuts were about 20 million b/d and the oil market is no longer in oversupply,” adding after destocking the tanker markets should be very strong because we would have recovered the lost demand and ships would have gone to recycling yards by then.
“We continue to grow the company, consolidation has a long way to go in our sector and from that point of view we need the market to be cyclical, and when you look at say the next three years, the market will continue to be volatile,” the CEO said, pointing to the potential wild swings in freight rates. “Overall the order book is very, very thin and the age profile of the fleet means there are plenty of candidates that will or can be scrapped in periods of market weakness,” he added.
The tanker market has been extremely volatile in the past three months. VLCC freight rates on a Persian Gulf to China voyage basis, which is one of the most active routes in tankers, averaged an all-time monthly high of $35.63/mt in April for a 270,000 mt cargo, compared to $27.25/mt in March.
So far in May, these rates are averaging $13.48/mt for a 270,000 mt basis, Platts data show. Rates are expected to soften further as the OPEC+ coalition production cuts are starting to drastically reduce the number of crude cargoes set for loading compared to recent months.
The transition to the 0.5% sulfur cap on January 1, 2020 saw Euronav prioritize cleaner marine fuels over gas exhaust cleaning systems, or scrubbers, with de Stoop calling compliant fuels “the right choice.”
“People who ordered scrubbers are now cancelling them… the market played out as they should and the difference in price between the two fuels is very low for now… things can change in the future but then we will adapt as we always try to do,” de Stoop said. The spread between very low sulfur fuel oil or VLSFO and high sulfur fuel oil, or HSFO, which goes into scrubbers, has narrowed sharply since the start of the year as demand for all shipping fuels collapsed. The economics of installing scrubbers has been called into question as a result, with the payback period widening to more than four years from the initial investment from less than a year in January, according to analysts.
“No one at Euronav was for or against scrubbers. We wanted to see how the market would develop and if the equipment was working and not polluting. Furthermore we wanted to assess the true economics which indeed depend on the spread. For the time being all the answers that we have are pointing in the direction of no scrubbers,” de Stoop said, but he did concede that Euronav has four vessels on order fitted with scrubbers.
“There is a big difference between retrofitting the fleet and buying tonnage with scrubbers already installed. Our view was that the economics of a scrubber retrofit was difficult and probably negative,” he added.
On the switch to cleaner fuels, de Stoop pointed out that the shift to VLSFO was not completely smooth and Euronav took a conservative approach by buying VLSFO in advance, testing it and monitored its evolution.
“We are very happy about that because whatever we bought in the market we had some bad experiences, nothing major, some additional cleaning, small damages to the vessel. The market is stabilizing now. The early months weren’t pretty, and we were pretty happy about what we had done, and we also heard from other people that they some bad experiences from the fuel they were using,” de Stoop explained. Industry sources told Platts earlier this year that the industry faced sediment-related issues in VLSFO which have since eased.
While de Stoop admits the coronavirus impact on demand has been a positive for the tanker market, the challenge of operating vessels under quarantine and lockdown measures has been difficult for its crews and seafarers generally.
The IMO has recognized the need for ships to change crews and for seafarers to fly home at the end of their periods of service have emerged as two of the biggest challenges facing the shipping industry as a result of the COVID-19 pandemic. It has drawn up a series of protocols and has urged their implementation, but de Stoop is pressing for faster action.
“Shipping is always the forgotten kid, we are responsible for transporting 90% of trade and nobody pays attention,” de Stoop said, adding the importance of shipping staff to be treated as key workers and being allowed to travel within certain rules and regulations.
“It is a difficult time for people working in the industry. A lot of people are allowed to travel because their work is critical, shipping is critical for the world. It is a very complex exercise, but my instinct tells me that if the public at large was aware of what we are going through and our crews then suddenly the politicians would move a little bit faster than they are doing right now,” he said. “And I think that’s a scandal.”
Euronav’s fleet includes 46 VLCCs — each of which can carry 2 million barrels of oil — as well as 25 smaller Suezmax tankers which can each carry 1 million barrels. It also has two megatankers each with maximum capacity of 3 million barrels.