It is no secret that the last few years have been boom years for the tanker shipping industry. We have all grown used to exceptional results, driven by a range of factors including a historically low orderbook, increasing global demand for transportation and the range of ongoing geopolitical and macroeconomic factors that we are all now deeply aware of.
But, as every shipping economist or shipowner can tell you, this is a cyclical business. Years of boom have always generally been followed by a tougher period, as supply begins to outstrip demand and freight rates drop. Martin Stopford described these short cycles best in his seminal book Maritime Economics, pointing out that they tend to last between three and 12 years and are always characterised by four stages:
- The trough, where low freight rates are coupled with low demand and excess supply
- A recovery period, where freight rates rise, and supply and demand move towards equilibrium
- A peak, where high freight rates outstrip vessel costs by a factor or two or three, and supply and demand are at an equilibrium point
- A collapse, where freight rates fall, and supply begins to exceed demand again
At present, we are indisputably at the peak. It’s worth saying that this sunny period is richly deserved, after many tough years following the last super cycle that ended in 2008. The obvious question, therefore, is how long will this last?
As Richard Meade wrote in Lloyd’s List earlier in June, present times are unusual in that all shipping markets are enjoying a positive period.
For tanker shipping in particular, our market has been effectively split in half by a combination of the Russian invasion of Ukraine and attacks in the Red Sea. While challenging for seafarers and for the overall risk environment, disruption – and record tonne-miles – are very good for business.
Meanwhile, the industry’s bearish stance on newbuild investments from a few years ago, driven by the uncertainty that was prevailing at the time, means that supply has been outstripped by transport demand.
There is plenty of money going around, and many owners will be rushing to the shipyards to build. These yards are already constrained for capacity, and there are stories every week about how some of the world’s biggest shipbuilding hubs are racing to find new – and sometimes creative – ways to meet the demand for new ships.
We must be careful not to overcorrect; anyone with enough experience in this business remembers what history usually does to the shipping market when the market is too good. If this period extends too long , the downturn cycle will be both longer and deeper.
While the fundamentals continue to look good, the real truth is that planning anything into the long term at the moment is an almost impossible task. What happens if an ongoing geopolitical conflict flares up and – unthinkably – draws world powers in? What will happen if something changes, either for the positive or the negative, in the global push to fight climate change? What happens if the IMO, or the EU, or the US, or China, imposes a new carbon tax?
Speaking of those newbuild orders, for owners getting the chequebooks out in the near future, what engine do you decide to put onboard? What fuel will you burn in 15 years? Will there be enough of it where you normally trade?
These are all questions that need answers. They are the questions being asked around the boardroom table of every shipping company at the moment. In truth, many of these questions don’t yet have answers. We should also remember that our industry always finds ways to adapt, even if the burden initially falls on the shipowners.
It’s why at Stena Bulk we have always tried to be pragmatic and flexible in our approach. For where we do feel we have at least partial answers, we have always tried to share our progress with the industry. We’re proud of what we’ve achieved with methanol and biofuels, and we have exciting developments underway on the digital front with our recent AI project.
In upcoming blogs, I will dive deeper into some of these challenges. And to answer the original question: how long will the current tanker cycle last? In the short term, nobody knows. But things are unlikely to change overnight, and there are indicators for when it will start to turn, so until then we must use the current strong period to prepare ourselves against future challenges.
By Erik Hånell, President & CEO of Stena Bulk
June 2024