​Is bigger better?

The past month or so in the tanker market has been all about consolidation – either realised or attempted.

This week, Scorpio Tankers revealed it is to acquire Navig8 Product Tankers through a merger. The merged entity’s fleet will consist of 105 product tankers, including 38 LR2s, 12 LR1s, 41 MRs and 14 handymax vessels, plus 19 ships on time or bareboat charters. Scorpio Tankers also has six MR tankers on order at Hyundai Mipo that are all scheduled for delivery this year.

In the VLCC segment, Frontline has hotly pursued a takeover of DHT Holdings, which was finally rejected by the company. A merger of the two companies would have created the world’s biggest listed tanker company. The combined fleet would have comprised 72 tankers, including 40 VLCCs. Frontline also has another 10 vessels on order, including four VLCCs.

But is it better to be bigger?

The rationale behind consolidation and creating an entity with many vessels is to create economies of scale in order to better compete on a cost-plus basis. However, rates continue to be depressed with little prospect of improvement.

Last year was a tough one for tankers – even for the larger companies. In the crude sector, Frontline and DHT saw their respective daily timecharter equivalent (TCE) rates decline by 46% and 50% over the course of the year, according to public filings. The products trade had it only slightly better: Scorpio Tankers saw its daily TCE rates fall 38.4% over the year.

The depression in rates was largely due to rising oil prices, limited additions in refinery capacity, high oil inventories and slow economic growth.

Asset play
Of course, if things were to really go belly-up in the charter market, then players with large fleets can always count on their residual asset values to shore them up, particularly if they’ve invested in modern quality tonnage. ¬¬That’s the theory anyway.

The dry bulk market has offered a cautionary tale. Star Bulk bought 34 bulk carriers from Excel Maritime that were valued at around $623m when the time the deal was agreed in August 2014. However , when the ships were delivered in April 2015, their collective market value had fallen to an estimated $351m, according to reports. Bulker asset values have appreciated since then, but still aren’t quite back to 2014 levels.

The respective values of a five-year-old VLCC (305,000 dwt) and MR product tanker (51,000 dwt) dropped by around 25% over the course of 2016, according to Baltic Exchange assessments. Tanker asset values are expected to remain depressed due to vessel supply growth and low newbuilding prices.

Buying a large number of ships can to some extent protect a company’s position but it’s still a gamble on future asset values, which remain subject to wider market forces.

Macro factors
Being a commoditised market, tanker companies are playing a waiting game for growth in seaborne volumes, which makes them vulnerable to macroeconomic factors. Aging consumers, technological innovation and protectionist trade politics are all big issues that have the potential to slow growth in international trade.

There are modest expectations for future demand growth for crude tankers, but these are likely to be offset by strong growth in vessel supply. What is more, the global fleets of crude tankers has an average age of just 8 years, and the clean tanker fleet (LR1s, LR2s and MRs) has an average age of around 8.5 years, according to our estimates. The relative youth of the fleets will prevent vessel supply and demand being rebalanced quickly.

Big players have the ability to throw their weight around and take a big market share, just like the little guy, they remain subject to vessel oversupply and sluggish demand growth.

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