David Foxwell describes analysis of the OSV market that predicts that it will recover more quickly than anticipated
David Palmer, chief executive of Pareto Securities in Singapore has some comforting words for offshore vessel owners. He believes the market could return to balance sooner than expected.
Mr Palmer and Pareto analyst Synnøve Gjønnes believe we are much closer to a turnaround in fortunes in the offshore support vessel (OSV) market than some would have us believe.
The key point is when the recovery will start to gain speed and when rates and utilisation will reach more normalised levels. Mr Palmer and Ms Gjønnes say that point “will be sooner rather than later” although they expect that any recovery will be volatile and there will be reversals. The key point they are keen to get across is that the OSV industry is not a ‘sunset industry.’
They assume that vessels that are older than 25 years will be cold stacked and scrapped. Vessels that are cold stacked but older than 10 years will need significant capital expenditure to bring them back into service.
Take out vessels that are cold stacked and owned by financially distressed owners who don’t have the working capital to take vessels out of layup. These vessels will be scrapped in place. Some could be sold.
Next, adjust the orderbook for speculative orders that have been under construction for more than three years. The resale price of vessels that are already in service will have an adverse impact on the economics of completing many newbuilds. Lastly, adjust the orderbook for low-end vessels where both owner and the yard are in significant financial distress.
This results in an adjusted fleet of in service vessels decreasing from around 3,500 ships to circa 2,560.
Current utilisation stands at 49% for the market as a whole, with the highest utilisation for the larger vessel categories. Adjusting for vessels that are not competitive, adjusted (real) utilisation stands at 68%. Pareto expects this to normalise to 78% in the longer term, although this may still be a couple of years down the road.
“At some point down-cycles end because sentiment stops people doing things that extend them. This is happening, and the market is turning – it’s a classic recovery cycle,” said Mr Palmer. “But the OSV market is like a VLCC, it takes time to turn around. All stakeholders need to be patient, because once it has turned it will be a long time before it trends down again.”