It’s been almost 9 months since my last tanker market update on the blog, and wow, what a ride. I was proven correct on my previous bullishness and despite risks, remain bullish today.
As you know, for the past few years, I’ve been bullish on product tankers, with Hafnia (OSE:HAFNI) being one of my core holdings. With a cost basis around 20 NOK (I started buying around 15), the stock, including dividends, has been a triple for me. Of course, past results are in no way an indication of future performance, yet I remain invested in Hafnia. Why? In this post, I’ll dig into why I think there’s still a good chance product tankers perform well going forward, despite recent weakness.
What is a product tanker?
To put it simply, a product tanker, also known as a “clean” tanker, is a ship that specializes in carrying refined fuels rather than crude oil. Usually this means they have a special lining in the tank - could be epoxy or stainless steel, for instance, and are usually smaller than the big crude tankers (the largest product tanker is roughly the size of an Aframax tanker, which is the smallest of the big crude tankers by far).
Clean tankers trade primarily on routes that follow the main import/export patterns for fuels, which is largely driven by regional refining differences, i.e. Saudi Arabia and India export a lot of diesel, Europe exports a lot of gasoline, the US is a major export provider for South America.
A primer to shipping rates
Returns in all of shipping are driven by a concept called “tonne miles”. A tonne mile is one tonne of cargo transported one nautical mile. To illustrate the importance of this concept, let’s lay out a theoretical scenario where two exporters provide all of the fuel for the entire world. For the sake of simplicity, let’s say that those two exporters are the Country A and Country B. Country A supplies the western world, and Country B supplies the eastern world. Now, let’s say something happens to Country B, and the entire world must now rely on Country A.
In our (fake) example, let’s say that each country is 10,000 nautical miles from their average trade partner, and each do an identical amount of total volume, but country A and country B are 20,000 nautical miles from each other, and on average country B’s trade partners are 15,000 nautical miles from country A. In this fake example, how many more ships would be needed if country A were to replace country B’s fuel exports? Let’s break it down.
Here’s the first question, how many ships are needed assuming both countries are exporting to their normal trade partners? The first question is, how much can a single ship handle? Assuming all of our ships are MR product tankers (the “yellow taxi” of the global tanker fleet), they can carry 50,000 deadweight (dwt) tonnes of cargo. At 12 knots, a single tanker would need 69.5 days each way to deliver a single 50k dwt cargo and return. A simple formula: 10000 nautical miles / (12 knots * 24 hours) * 2 = ~69.5 days round trip.
In the real world, there would be some sort of triangulation going on, which in very simplified terms, means you almost never have ships going back and forth from point A to point B, the ship tries to drop off the cargo from point A at point B, and then find another cargo nearby. In the real world, if a ship is ballasting, i.e. carrying water to weight the ship down and burning fuel without being paid to carry cargo, they are spending money without taking any in, so ships try to plan a triangulation so that they can make some money - while going a bit out of their way - en route from Point B back to Point A.
This is a simplified example, however, so we’re making the assumption that our example trade route is always Country to Trade Partner, and ballast back for a new cargo.
To supply their partners with their fuel needs of 1M tonnes of fuel per month, Country A and Country B each need to have 20 ships leaving every 30 days. How many ships does each country need, before our example calamitous disaster which completely and permanently disables the export capacity of Country B, in order to have a constant stream of 20 ships per month leaving and keep all of the trade partners supplied?
69.5 days /(30 days / 20 ships) = 47 ships (I’m rounding up because we never have a partial ship)
In total, our theoretical world needs 93-94 ships. Now, our extraordinary event has completely disabled Country B. Country A must now supply all of Country B’s partners. We run the same calculation as above, changing only the distance. It’s now 104 days round trip for Country A to supply Country B’s former trade partners.
15000 nautical miles / (12 knots * 24 hours) * 2
104 / (30 / 20) = 70 ships
So, our theoretical world now needs 117 ships, the original 47 for each trade route, plus 23 more, to handle the increase of 5000 nautical miles on route B. The only problem is, it can take a few years to build a new ship, so two things happen: prioritization (some trading partners will pay more than others, increasing rates), and ships speed up (because they want to rush to the trading partners who are paying more). Of these two factors, rates and speed, speed is limited by the physical limits of the vessel, but rates are limited only by the ability of trading partners to pay for delivery - which next to the value of the cargo, generally means shipping rates can go extremely high when there is a shortage of ships (as far as the highest bidder is willing to carry them).
In our example above, let’s redo the calculation, but assuming a speed of 15 knots rather than 12 knots.
Country A original trade partners 10000/(15*24)*2/(30/20) = 37 ships
Country B’s former trade partners 15000/(15*24)*2/(30/20) = 56 ships
Total: 93 ships
In our theoretical scenario but using roughly real world speeds, if the fleet speeds up, over the long term, it should be able to supply the world with the same fleet size, with a few caveats:
Fuel consumption per ship increases substantially (meaning more fuel is needed)
The temporary dislocation as Country B suffers the Calamitous Event, in the short term, throws shipping into chaos - ships must first sail to Country A, meaning the first few months are heavily disrupted
What if the fleet can’t speed up?