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Danish Ship Finance: Green agenda threatens tanker market

Climate concerns among consumers, politicians and businesses could impact the tanker carriers far quicker than they expect. In a new report, Danish Ship Finance points to a surprisingly fast-growing demand for green energy.

Photo: Modelfoto/Colourbox

The global green agenda is developing so rapidly that it could become a serious challenge to tanker carriers much sooner than the industry anticipates.

This is one of the conclusions set down by Danish Ship Finance in its biannual market analysis. The shipping bank notes that the tanker market will come under pressure from the demand for sustainable energy, which grew surprisingly fast in 2015 and looks set to continue growing in the years to come.

This development is attributed to factors such as the clear signal sent by world leaders at the climate summit in Paris indicating that they are looking to reduce fossil fuel consumption, and the fact that the price for solar and wind energy is now so low that it can compete with oil and gas.

Within 12-18 months we project that all three tanker segments will be looking at significantly worse market expectations than is the case today"

Christopher Rex, chief analyst, Danish Ship Finance
This will end up impacting the tanker sector earlier than anticipated, projects Danish Ship Finance, thus casting serious doubts on the durability of the current tanker boom.

Until now, most players in the sector have been citing the fact that demand for coal will plummet, which has sent money seeping out of dry bulk. But the tanker carriers will also be affected by the green transition in the near future.

"Within 12-18 months we project that all three tanker segments will be looking at significantly worse market expectations than is the case today," says Christopher Rex, chief analyst at Danish Ship Finance.

"It's likely that many tanker carriers will disagree with this, and I truly hope that they're right. It would be the best thing for all of us. But there's not much to indicate that the demand for oil, for instance, will increase big-time in any countries anytime soon," he tells ShippingWatch.

Unsustainable recovery

At a time when sliding freight rates are pulling down container as well as dry bulk, the tanker market is frequently highlighted as a bright spot as both oil and gas have represented solid businesses for the carriers in 2015.

But this is not a sustainable recovery, notes the shipping bank in the report. And as such, the good times could quickly change for the worse.

"It's not a matter of underlying demand, but rather more about industrial overcapacity which is right now boosting activities. Looking at crude tanker as an example, the recovery is largely based on the fact that new refineries have come online, pulling in lots of oil, while the oil price has also been low," says Christopher Rex.

He cautions against making plans on the basis of the tanker market continuing at the current level for the next 15-20 years.

"Right now there are somewhat large orderbooks in all tanker segments. And the fleets are fairly young, so if demand disappoints, there are only a few ships left as obvious candidates for scrapping, which could make it difficult to achieve a return to balance between supply and demand," he says.

Changes are here to stay

Danish Ship Finance generally cautions the shipping industry against thinking that the current challenges are cyclical in nature.

Rather, the global economy is undergoing what the bank describes as "slow but dramatic" changes that impact how we live our lives and spend our money, and thus also affect the carriers' business.

Specifically, the report points out that the so-called fourth industrial revolution triggers a global switch toward a greener economy with a focus on services rather than products. This leads to a reduced need for the transport of goods, and the sector could therefore be forced to change.

"Some investors seem to believe that past dynamics remain intact and that the shipping industry will be on its way out of the doldrums in a year or two," writes the bank in the analysis, calling on players in the industry to face the new reality.

"We need to realise that much of what we think we know about how the world works is about to become outdated," writes Danish Ship Finance.

Find the complete Shipping Market Review May 2016 here.

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