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NASDAQ: PXS

OVERVIEW


INDUSTRY

We at Pyxis believe that our quality 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 more recently the 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 high charter rates.  Inventories of certain refined products remain below 5 year averages in many locations. The Chinese government announced a dismantling of its severe Covid restrictions in December, 2022 which has resulted in measured improvement domestically in mobility and demand for transportation fuels. In late January, 2024, the IMF slightly revised upward its estimate for global GDP growth for 2024 and 2025 to 3.1% and 3.2%, respectively, due to falling inflation and a better economic outlook for the U.S., Emerging Markets and China. In February, 2024 the IEA slightly revised its estimate for global oil consumption for 2024 to increase to 1.2% at an average of 103 Mb/d.

The global economic environment continues to be very fluid, complex and volatile. The relatively high rate of inflation, 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 more recently the uncertain implications of the Israeli/Hamas conflict.  Positive near-term industry fundamentals are currently met with relatively tight inventories and solid end market demand combined with the impact of the continued ban on Russian refined products, and more recently, the dislocation caused by the conflict in the Mid-East. 


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 early February, 2024 the EIA estimated that U.S. crude production would average over 13.2 Mb/d in 2024 and increase another 2.3% in 2025. Drewry, a well-respected independent research firm, estimated in July 2023 that seaborne trade of refined products increased 1.7% to over 1 billion tons, while ton-miles rose 3.2% to almost 3.4 trillion in 2022. For 2023, Clarksons estimated refined products cargo volumes increased 3.3% but ton-miles grew 10.3%. Recently, Clarksons estimated global seaborne trade of refined products would grow 3% to over 1.1 billion tons in 2024 and ton-miles rise a further 7.3%. All represent continued positive momentum for the sector.


Changes in refinery locations have also led to further ton-mile demand for product tankers. The emergence of export-oriented, highly 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 July 2023, Drewry estimated that 4.38 Mb/d of new capacity(net) is scheduled to come on line between 2022-2028, virtually all non-OECD. According to the EIA, since January 2020, 3 Mb/d of global refinery capacity, of which 1 Mb/d was located in the U.S., has been shut-down or converted. 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. 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, expanding market dislocation and further increasing ton-miles. Over the first 5 weeks of 2024, product tanker voyages through the Suez Canal have reportedly dropped 60%.

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 3,165  product tankers which range from 10,000 to 80,000+ dwt and aggregate over 173.0 million dwt as of June 30, 2023 according to Drewry. Our area of focus, the Medium Range (or MR2) category represents the largest total carrying capacity at 47.2% (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 very positive with modest new ordering and rapidly aging global fleet. 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 orders being pushed into 2026.The placement of orders for new builds 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. 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.


Ordering for new construction of MR2 picked-up in 2023, and Poten, a well-known ship-broker, estimated in mid-February, 2024 that the orderbook stood at 8.6% (152 vessels) of a worldwide fleet of 1,761 MR2’s (42-60K dwt). Slippage in new build deliveries has averaged 12.3%/yr. or 8 MR’s/yr. during 2018-22 according to Drewry and that the number of MR2s over 20 years of age exceeds the orderbook. Despite the number of old MR2’s, demolition continues to very low by historical standards due to positive chartering conditions and modest scrap metal prices.  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 continue to estimate that annual fleet growth, net of vessel scrapping and delays in MR2 newbuild deliveries, to be less than 2% for 2024.


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

Through a 60% ownership interest, we control a single ship joint venture which owns a 2016 Japanese built 63,250 dwt Ultramax dry bulk vessel. More recently, we acquired a 2015 built Chinese built 83,013 dwt. Kamsarmax carrier. These strategic investments into the dry bulk sector are supported by counter-cyclical fundamentals 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.


 Demand growth for many dry bulk commodities, primarily consisting of iron ore, coal, gains and minor bulk materials, is primarily tied to global GDP growth which should exceed 3% through 2025, according to the IMF.  In early February, 2024, Howe Robinson, a well-respected ship broker and chartering agent, estimated that dry cargo growth would slow to 2% to 6.3 billion tons in 2024 due to lower demand for iron ore and coal from China, a major importer. In addition to the impact of the various aforementioned hostilities, climate disruptions are affecting global trade. For example, extended, severe drought conditions have restricted transits through the Panama Canal, and according to Braemar, increased ton-mile activity by 5% due to re-routing. 

 

 Howe Robinson forecasts that overall dry bulk net fleet growth will be 2.2% in 2024. It estimated that at the start of 2024, the Supramax (vessels of 46-70K dwt) orderbook stood at 360 units or ~11% of the global fleet on a tonnage basis. As to the Panamax segment (70-84K dwt), 217 ships were on order which represented 9% of the global fleet. The average age of these two segments was 12.2 and 11.3 years, respectively, about half of the average age of vessel scrapping over the 10 year period ended 2022.   

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