IC Market Espresso 15 Apr 2019

Product Tankers Market Outlook
The product tanker market has experienced a rough couple of years with low charter rates slicing the industry’s profitability, however things seem to be improving. That is why, in today’s blog, we bring you some key trends which will shape the industry in 2019.
The Market in 2018

It is no secret that the product tanker market has been struggling for years as rising costs were repeatedly faced with decreasing charter rates.  This was clearly seen in 2017 and the better part of 2018 when rates fell below the historical average. However, the product tanker market picked up in the fourth quarter of 2018, partially reversing the downward trend observed in the first nine months of the year. The beginning of the quarter was weak in line with the previous quarters, as rates hovered close to historically low levels, but the market gained momentum from early November onwards. The increase in rates was partly due to a surge in crude tanker rates, which had a positive effect on product tankers, with a high number of LR2 vessels shifting from clean trade to dirty products or crude and therefore, reducing tonnage availability in the product tanker market. In addition, the stronger crude market significantly reduced cargo poaching by newbuilding crude tankers on clean routes. Aside from the positive spill over effects from the crude market, the product tanker market was boosted by seasonally stronger demand due to increased heating oil consumption, while adverse weather conditions reduced tonnage availability. Furthermore, refinery outages in Brazil and Mexico required substantial volumes to be moved with product tankers to meet demand, which contributed to the positive trend.

Charter Rates (USD 000)

Charter Rates (USD 000)

Source: Morgan Stanley

IMO 2020

An important factor to consider in the upcoming period for the product tanker market is the introduction of the IMO 2020. The IMO 2020 is a regulatory requirement set by the International Maritime Organisation which mandates ships to emit less sulphur dioxide by only using fuel oil with less than 0.5% sulphur content (vs 3.5% currently). Note that the regulation was initially introduced back in 2016, however its implementation was postponed.

In order to reduce the sulphur content to the required amount, shipowners will have to decide between:

  • Installing a scrubber to enable the vessel to burn HSFO
  • Paying the premium to consume compliant fuels with a sulphur content <0.5% (MGO and LSFO Blends)
  • Use LNG as bunker fuel

Among the options which are available, the installation of a scrubber is the least expensive one. Moreover, scrubbers’ favour larger vessels that consume more fuel and have trading patterns consisting of more time at sea.

Yet some feel that the new regulation might have a positive effect on the tanker market. For instance, one could expect an increase in crude tanker trade due to increased refinery utilization and throughput in order to produce more low-sulphur fuels. Furthermore, it could lead to an increase in clean tanker trade due to the increased production of low-sulphur fuel and the need to deliver these fuels to global bunker markets. Finally, it would lead to a higher floating storage demand for both clean products (building inventories of low-sulphur fuel prior to 2020) and dirty products (a need to store excess fuel oil post-2020).

Supply & Demand

Product Tanker Deliveries ( # of Vessels)

Product Tanker Scrapping (# of Vessels)

Source: Scorpio Tankers

On the supply side, 2018 saw a decrease in deliveries of product tankers, coupled with a record high number of scrapings. This helped to shrink the fleet overcapacity which had a negative effect on rates and profitability. Looking forward, the expected growth rate for 2019 is set at 3.3% YoY.

Supply & Demand Growth Rates (%)
Source: Scorpio Tankers

According to Lloyd’s List, the strength of US Gulf exports of gasoline and middle distillates will continue to provide a floor to freight rates for the global fleet of MR tankers. Latin American countries are establishing and expanding gasoline and diesel trade routes thanks to record refinery runs in the US, fuelled by access to cheap domestic shale crude. Refinery outages and under-utilisation that have dragged refinery output lower in Mexico and Brazil in particular, underpin these rising shipments, rather than increasing demand for refined products. Note that the market has also been witnessing an increase in tonne-miles as a result of expanding refinery capacities in Saudi Arabia and the United Arab Emirates.

To see how the described market conditions impacted the results of Croatian shippers (Tankerska Next Generation), click here

NLB Bank Proposes EUR 7.13 DPS & Invites Investors to Subscribe Subordinated Tier 2 Notes

At the current share price, dividend yield is 11.5%. The company also invites investors to subscribe subordinated Tier 2 notes up to EUR 75m.

Nova Ljubljanska Banka published their 2018 annual report in which they proposed EUR 142.6m to be paid out as dividend to their shareholders, which would translate into a dividend of EUR 7.13 per share. The proposed dividend is in line with the company’s prospectus in which the company management has set a target of a dividend payout of around 70% for the years 2019 – 2023. At the current share price, dividend yield is 11.5%.

Note that this is the first time NLB proposed a dividend since the public offering in 2018.   

As a reminder, for 2017, NLB paid out a dividend of EUR 270.6m, which translates into EUR 13.53 dividend per share and a dividend yield of 22%. EUR 189m was paid out from the companies net income and EUR 82m was paid out from previous years’ retained earnings. This would make the dividend pay-out for 2017 amount to 84%. However, if we only took into consideration the part paid out from NLB’s 2017 net income, the dividend per share would amount to EUR 9.45, while the dividend yield would amount to 15%. Note that as dividend was paid out prior to the public offering, the Slovenian state was entitled to the full dividend.

Invitation to Subscribe Subordinated Tier 2 Notes

Besides that, the company also published a document in which they invite investors to subscribe subordinated Tier 2 notes. The nominal value of the subordinate Tier 2 notes issue is up to EUR 75m. The nominal principal amount of the notes will be paid out in full amount of 6 May 2029 (unless previously redeemed by the issuer).

The fixed coupon interest rate during the first five years will be 4.2% p.a. (based on the 5Y MS and the fixed margin); thereafter the fixed coupon interest rate shall be determined based on the sum of the then applicable reference interest rate (5Y MS) and the fixed margin as defined at the issuance date of the notes.

Note that the company’s management stated that the main reason for the Tier 2 issuance is the optimization of NLB’s capital structure. Currently the company’s capital adequacy ratio (CAR) amounts to 16.7%, which all comes from common equity Tier 1 (CET 1). Note that the overall capital requirement (OCR) is 14.75%. This would mean that the Tier 2 issuance could, potentially, lead to an additional dividend payout, which is yet to be seen.

Croatian Tourism in February 2019

In February 2019, Croatia observed the arrival of 0.26m tourists (+20.7% YoY), while tourists nights amounted to 0.55m (+13.3% YoY).

Croatian Bureau of Statistics published a document about tourism in February 2019.

According to the report, January 2019 observed the arrival of 0.26m tourists, which represents an increase of 20.7% YoY. Meanwhile, tourist nights amounted to 0.55m, which represents an increase of 13.3% YoY.

The most foreign tourist nights in February 2019 were recorded by tourists from Slovenia, as much as 31 thousand nights (18.3% of the total foreign tourist nights), When compared to February 2018, tourists from Slovenia observed a 22% increase. These were followed by the nights recorded by tourists from Austria (10.1%), Germany (8.0%), Italy (6.0%), the Republic of Korea (5.9%), Bosnia and Herzegovina (5.7%), the USA (4.3%) and Serbia (4.2%).

Zagreb observed the largest number of tourist arrivals and nights in February 2019. Arrivals amounted to 60 thousand, which represents 22.6% of the total arrivals, and 116 thousand nights, which was 21.1% of the total nights.  Compared to February 2018, there were 12.4% more arrivals and 14.0% more tourist nights.

The most tourist nights were observed in hotels, as much as 0.37m, which represents 67.4% of the total number of nights. Compared to February 2018, hotels recorded an increase in tourist arrivals of 19.8% and in tourist nights of 12.9%.

Dalekovod Secures a Project Worth EUR 52m in Norway
Note that the value of the deal would account for 31.5% of the 2018 operating revenues. This revenue will be fully realized by the end of 2022. 

Dalekovod published a document in which they announced that Norwegian Statnett, an electric power transmission company, informed that the offer made by Dalekovod was chosen as the best one according to the criteria of the tender for the construction of a new 420 kV transmission line between Skillemoen and Skaidi substations in the total length of 89 km.

The value of construction works to be realized by the end of 2022 is more than EUR 52 million and the company notes that the contract will be signed after Statnett’s final investment decision has been confirmed.

Note that the value of the deal would account for 31.5% of the 2018 operating revenues.

This is not the first time that Dalekovod is doing business with Statnett this year. As a reminder, in February, the company concluded a deal worth more than EUR 44m. More about the mentioned deal can be read on the link here.

Belgrade Airport Q1 2019 Traffic Report
In Q1 2019, Belgrade Airport (AERO) traffic grew by 3.7%, amounting to 1.04m passengers.

Vinci published their Q1 2019 traffic report declaring that traffic on the Belgrade Airport (AERO) grew by 3.7%, amounting to 1.04m passengers. Note that this represents a record first quarter for AERO, as this is the first time that the airport observed more than 1m passengers in Q1.

As a reminder, Belgrade Airport recorded 5.6m passengers in 2018 (+5.4% YoY). Note that the airport targets 6.2m passengers in 2019.

To read more about AERO click here.

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