Tanker Orders: Too Much, or Not Enough?

A growing tanker orderbook starts an age-old discussion

Last week, in our annual forecasting opinion ("A Fool's Game?"), we prognosticated that the tanker orderbook will decline in 2026. We are still early in the year, but the headlines from many of the trade publications seem to indicate that this may not happen. It appears that many shipowners and other investors in our industry a lining up even more newbuilding orders. In this week's tanker opinion, we will give a little more background on why we think (hope?) the orderbook will decline and why we could be wrong.

For an individual shipowner, there are a number of possible reasons to order a new tanker. Fleet renewal, expansion or diversification are some of those reasons. A relatively small group of owners only look at newbuildings when they want to expand their fleet or replace older tonnage. These owners, let's call them "traditional owners", are usually very particular about vessel specifications and vessel maintenance, and will rarely consider buying secondhand tonnage. These traditional owners are not trying to "time the market", they sell vessels and order replacement tonnage throughout the cycle, often against fixed employment contracts. Most of the traditional owners are private companies, who have been in the business for generations and are typically well capitalized.

There is a large group of other owners who take a different, more opportunistic, approach. For fleet replacement and/or expansion, they compare newbuildings with secondhand tonnage and keep a close eye on relative prices and current as well as future earnings. The actions of these "opportunistic" owners are much harder to predict than those of the traditional owners. A lot of the tanker community falls into this category, and their activities have a big impact on global fleet developments. In addition to regular shipowners (both privately owned and publicly traded), this category also includes non-traditional shipowners, such as private equity firms and other financial investors, as well trading houses. The activity of opportunistic owners frequently pushes up secondhand values and newbuilding activity.

The tanker industry is characterized by significant volatility in both earnings and asset values. Geopolitical conflicts and sanctions further amplify these cycles. This often leads to relatively short periods of high earnings, followed by extended periods of underperformance. Tankers are long-term assets with a 20+ year lifespan, which means that brief periods of overbuilding can create long periods of oversupply. Under normal circumstances, our industry should replace about 5% of the fleet every year. Since the lead time for new vessel construction is currently about 3 years (a vessel ordered today will be delivered in late 2028/early 2029), this means that an orderbook of around 15% of the fleet is about right.

However, this also assumes that about 5% of the fleet ages-out every year, i.e. is recycled. That has not been the case in recent years. Despite limited newbuilding deliveries in recent years, the tanker fleet has grown steadily because recycling has been low. Older vessels are sold for further trading into the dark fleet rather than sent to the breakers.

We currently have a situation where the tanker orderbook is rising rapidly, stimulated by a number of drivers: 1) Prices for modern secondhand vessels are high, making newbuildings comparatively attractive; 2) Rates have been strong for an extended period of time and (in particular for VLCCs) have increased even further in recent months; 3) The average age of the fleet is high with a significant percentage of vessels at or approaching retirement age.

Pundits argue that the stage is set for a sustainable bull run in the tanker market. However, there is an alternative scenario. Counter to previous periods with high orderbooks (like the 2004-2008 Supercycle), oil demand is not expected to grow very quickly. The strong rate environment in recent years has more to do with (temporary) market inefficiencies and dislocations due to geopolitics and sanctions, than with fundamental demand. Even if sanctions are lifted, a part of the dark fleet may stick around and the large influx of newbuildings in the coming years could create significant overcapacity and a depressed rate environment. A slowdown in ordering this year may just prevent another boom-bust cycle from happening.

This coverage appears courtesy of Poten & Partners.

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.