We at Pyxis believe that our modern eco-efficient mid-sized vessels, operated safely and well maintained by our managers, lead to attractive chartering arrangements and cost-effective return on capital for the benefit of our shareholders.
Product Tanker Sector
Primarily, we address the worldwide market for the marine transportation of refined petroleum products, which is driven in turn by demand for transportation fuels, including gasoline, diesel/gas oil, jet/kerosene and naphtha. We believe that fundamental population growth combined with increasing per capita incomes and further industrialization will lead to long-term demand growth globally for transportation fuels. Since Fall, 2020, we have seen a gradual global economic recovery from Covid-19 which was supported by record setting monetary and fiscal stimulus programs of leading governments and central banks. The roll-out of multiple vaccines started in late 2020 and led to robust economic activities and greater mobility, primarily in developed countries. However, the invasion of Ukraine by Russia in late February, 2022 shocked the global energy markets. As a member of OPEC+, Russia has been a major producer of crude oil at 11.4 million barrels/day as of February 2022 of which ~8 Mb/d were exported. At that time, Russia exported 2.85 Mb/d of refined petroleum products of which 1.5 Mb/d went to Europe. As a result of this war, many countries introduced a broad range of sanctions on Russian goods and commodities, including petroleum products, which has affected global trade and relationships. Further, the EU and G-7 group of 27 countries ban on the importing of Russian refined products and price caps went into effect in early February, 2023. The Russian/Ukrainian war and the more recent expanding Red Sea conflict have caused major disruptions in the global oil markets, changing trade patterns, supply dislocations of refined products, expansion of ton-miles and higher charter rates. Inventories of certain refined products remain below 5 year averages in a number of locations. The Chinese government announced a dismantling of its severe Covid restrictions in December, 2022 which resulted in measured improvement domestically in mobility and demand for transportation fuels. In October, 2024, the IMF slightly revised its estimate for global GDP growth for 2024 and 2025 to 3.2% per year due to falling inflation and a better economic outlook for the U.S. and Emerging Markets. In November, the IEA slightly revised its estimate for global oil consumption to increase ~1% per year for 2024 and 2025.
The global economic environment continues to be very fluid, complex and volatile. The relatively high rate of inflation, albeit decelerating, cost of living pressures and tight monetary policies have resulted in slowing economic activity in many parts of the world. The outlook in the short-term will be dependent of the impact of de-stabilizing geo-political events and macro-economic conditions, led by the Russian/Ukrainian war, and the uncertain implications of the Israeli/Hamas/Iran conflict in the Middle East. The product tanker sector may benefit from the prospect of greater restrictions against certain sanctioned countries which may help offset the effects from the possible de-escalation of these armed conflicts. Positive near-term industry fundamentals are met with relatively tight inventories and modest end market demand combined with the impact of the continued ban on Russian refined products, and the dislocation caused by the conflict in the Mid-East which further expand ton-miles. However, the potential expansion of tariffs amongst major trading partners is likely to lead to further market volatility.
The United States, Asia and Middle East are the largest exporters of refined products, accounting for over half of total exports. Refining capacity, inventory levels, domestic demand and worldwide arbitrage opportunities can influence the movements within these regions. In the past, global shifts in refining capacity and the increase in U.S. crude oil production, led by the rapid expansion of shale-based oil, have been positives for demand of product tankers. In the first week of November, the EIA estimated that U.S. crude production had risen to 13.5 Mb/d with a forecasted increase of 3.8% to average 13.7 Mb/d in 2025. Drewry, a well-respected independent research firm, estimated that 2023 seaborne trade of refined products increased 2.4% to over 1.04 billion tons, while ton-miles rose 4.6% to almost 3.58 trillion miles and sailing distances up 2.2%. Despite slowing growth in refined products seaborne cargo volumes, Clarksons estimated that ton-miles have grown 6% YTD through September, 2024. For next year, the firm forecast demand growth of 2.9%.
Changes in refinery locations have also led to further ton-mile demand for product tankers. The emergence of export-oriented, more efficient mega-refineries located near the well-head, e.g., the Middle East, and the reduction of OECD (namely in Europe, Japan and Australia) refining capacity are examples of factors that influence locations of refineries. In August 2024, Drewry estimated that 3.72 Mb/d of new capacity (net) is scheduled to come on line between 2024-2028, virtually all non-OECD.
The Ukrainian/Russian war has amplified conditions in the EU with greater importing of refined products into these mature large markets, while shifting of Russian cargoes to other markets, all resulting in increased ton-miles and limiting tanker availability. Ukrainian air attacks have taken a material amount of Russia’s refining capacity off-line, further disturbing trade flows. In addition, starting in January, 2024, the Red Sea conflict has negatively impacted shipping with re-routing from the Suez Canal around the Cape of Good Hope (“COGH”), expanding market dislocation and further increasing ton-miles. Product tanker transits through the Suez are down 60% from late last year. Typically, voyages around the COGH add 15 sailing days from ports in the Arabian Sea to Europe vs. the Suez Canal passage.
Product tankers are differentiated by their coated cargo tanks, predominately epoxy-based paint, which minimize any corrosion from refined petroleum products and facilitate the rapid cleaning of cargo holds. Based on carrying capacity, the worldwide product tanker fleet ranges from small tankers under 10,000 deadweight tons (or dwt) carrying capacity to 120,000 dwt. A main group of vessels transporting the majority of cargoes consists of 3,210 product tankers which range from 10,000 to 80,000+ dwt and aggregate over 176.4 million dwt as of July 31, 2024 according to Drewry. Our area of focus, the Medium Range (or MR2) category represents the largest total carrying capacity at 46.8% (dwt) of the product tanker sector. MRs are considered the workhorse and usually operate in the Atlantic and Pacific basins. Customers include major integrated and national oil companies, international commodity trading firms and refiners.
The vessel supply picture continues to look reasonably positive, albeit new orders for tankers have increased significantly since the start of 2023 and the long anticipated scrapping of older, less efficient tankers continues to be postponed. The growth in the supply of product tankers is primarily related to new build orders, usually placed at Asian shipyards, and demolition of older tonnage. Aggressive new orders for containerships and gas carriers have resulted in delivery slots for new MR2 product tanker orders being pushed to 1H 2027. The placement of orders for new builds (“NB”) is primarily a function of a shipowner's outlook for demand for such vessels (i.e., future charter rates), construction costs and availability at the yard, age of the existing fleet as well as cost and availability of funding. NB prices for MR2s remain close to $52 million, exclusive of higher specifications, yard supervision and spares. Other decision-making factors for an owner include developments in ship and engine design, scrubbers, stricter environmental regulations, as well as the availability and pricing of alternative low-carbon fuels. Product tankers have an expected operating life of 25 years, but certain major charterers have lower age restrictions.
According to Arrow Ship Brokering Group (“ASBG”), increased ordering for the new construction of MR2s has resulted in the orderbook (OB) of 16.5% or 307 tankers of a worldwide fleet of 1,856 MR2s (42-60K dwt) as of November 1, 2024. Slippage in new build deliveries was 9.7% last year, and the pace continues to be slow as only 30 MR2s were delivered in the first 10 months of 2024. There were 254 MR2s, or 13.7% of the global fleet, over 20 years of age. Despite the number of old MR2s, demolition continues to very low by historical standards, only four in 2023 and zero YTD 2024, due to positive chartering conditions and strong asset values. However, ever-expanding environmental regulations, high bunker fuel prices, increasing running costs, reasonable scrap prices and vessel aging should result in more demolitions of older tankers over the long term. We estimate that annual fleet growth, net of vessel scrapping and delays in MR2 newbuild deliveries, to be ~ 2% for 2024 and 5% in 2025.
Tanker operations and vessels are significantly regulated by international conventions, such as SOLAS and MARPOL, class requirements, various governmental health, safety and environmental laws and regulations, including OPA and CERLA, IMO regulations and by other jurisdictions. New IMO regulations governing CO2 emissions, including Energy Efficiency Existing Index (EEXI) and Carbon Intensity Indicator (CII), may lead to a reduction /limitation of available vessels, including slower speeds starting 2023. The independent classification societies certify that a vessel has been built and maintained in accordance with established rules and regulations, including periodic inspections and surveys of the vessel. In addition, many charterers have established certain standards to employ vessels carrying refined products guaranteed by strict vetting processes. Consequently, quality vessels and flawless operations are paramount within the product tanker industry.
Dry Bulk Sector
We own controlling interests in three modern mid-sized eco- efficient dry bulkers. Through a 60% equity interest, we control a single ship joint venture which owns a 2016 Japanese built 63,250 dwt Ultramax dry bulk vessel which was purchased in September, 2023. In February, 2024, we acquired a 2015 built Chinese built 83,013 dwt. Kamsarmax (KMAX) carrier, and in late June, 2024, we closed a similar joint venture investment in a sister ship. These strategic investments into the dry bulk sector are supported by counter-cyclical fundamentals, and to a lesser extent, counter seasonal activity, in contrast to the product tanker sector and should provide attractive long term returns to our shareholders. Our management and Board members have extensive experience in owning and operating dry bulk carriers.
At this point, dry bulk supply/demand fundamentals are reasonably in balance for the short to -near-term. Demand growth for many dry bulk commodities, primarily consisting of iron ore, coal, gains and minor bulk materials, is moderately tied to global GDP growth which is expected to increase 3.2 %/yr. on average through 2025, according to the IMF. Growth in Chinese GDP was recently lowered to 4.8% for this year and 4.5% for 2025. In October, Clarksons estimated dry bulk demand growth of 4% for the year primarily due restocking of iron ore and coal in China, a major importer, and strong minor bulk volumes. For 2025, Artic Securities forecasted dry bulk volumes to increase 2.2%, while ton-miles to rise 3%. Over the period 2023-29, Drewry recently forecasted total dry bulk demand growth of a CAGR of 2.4%, consisting of iron ore 2%, coal 1.5%, grains 2.8% and other minor bulk commodities 3.1%. While drought conditions have significantly improved and transits through the Panama Canal have normalized in 2024, unpredictable weather events, such as hurricanes, can temporarily disrupt seaborne trade.
In November, 2024 Arrow Ship Brokering Group estimated the orderbook at 120.6M dwt. or 11.7% of the worldwide fleet of dry bulk tonnage with 9.8% of capacity at 20 years+. It estimated the current OB for Panamax carriers (72-86K dwt.), including Kamsarmax bulkers, at 362 or 14.3% of the global fleet of 2,530 carriers. Importantly, a higher percentage of PMAX/KMAX vessels, 16.7%, is over 20 yrs. old. Arrow also reported the OB for the modern Ultramax class (60-72K dwt.), to be 478 units or 30.6% of the global fleet of 1,561 vessels. Delays in NB deliveries has not been a material factor historically given the large number of Chinese ship yards. Assuming the average scrapping rate for the past 10 years, Allied Chartering recently forecasted the net fleet growth in 2025 for Supramax/Ultramax and PMAX/KMAX at 3.2% and 2.9%, respectively.