NASDAQ PXS 0.78 -0.02 -3.07%
Volume: 246,612 September 17, 2021

We at Pyxis believe that our quality 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.

Primarily, we address the worldwide market for the marine transportation of refined 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. However, the outbreak of the pandemic COVID-19 in early 2020 negatively affected global economic conditions and contributed to a significant decline in the prices of crude oil and refined petroleum products. Starting last fall, we saw a gradual global economic recovery which has been supported by record setting monetary and fiscal stimulus programs of leading governments and central banks. Moreover, the roll-out of multiple vaccine starting late 2020 has led to robust economic activities and mobility, primarily in developed countries. However, the situation continues to be very fluid and uncertain and an improving outlook will ultimately depend on Covid variants, vaccination rates and further government restrictions/lockdowns. The vessel supply picture continues to look very positive with low new ordering and increased tanker demolition. These positive expectations could lead to a recovery in the product tanker sector starting in late 2021 but significant volatility could occur in the interim.

The United States, Europe, China, India and Middle East are the largest exporters of refined products, accounting for over half of total exports. Refining capacity, 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. According to a leading industry source, since 2010 U.S. exports of refined products have grown to 5.1Mb/d by 2019, representing a Compound Annual Growth Rate (CAGR) of 10.6%. However, the effects of the pandemic since last spring have depressed demand and help reduce commodity prices. U.S. crude oil production has declined from a record 12.2 Mb/d average in 2019 to 11.3 Mb/d in 2020. The EIA estimated as of July 7, 2021, that U.S. oil production would decline 0.2Mb/d to average 11.1Mb/d in 2021 with a modest increase to average 11.9 Mb/d in 2022. Also in July, the IEA maintained its 2021 forecast in global oil demand growth of 5.4Mb/d with a further 3Mb/d increase in 2022 which should approximate a return to pre-Covid levels. 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 2021, Drewry estimated that nearly 4.26 Mb/d of new capacity is scheduled to come on line between 2021-2025, most of it not in the OECD. The IEA recently reported that 1.7Mb/d of refining capacity had been announced for closure, principally within the OECD, which should result in greater importing of refined products into these mature large markets and an increase in ton-miles. Non-OECD refineries accounted for 55.4% of global capacity in 2020. Overall, seaborne trade in products has grown at a CAGR of 2.8% between 2010 and 2019, rising to 1,036 million tons, while ton mile demand over the same period had a CAGR of 2.8%. Note, 2020 is considered an outlier because of the impact of Covid-19. Seaborne trade of products has been highly correlated with historical global GDP growth, which during the same 10 year period averaged 3.2%, according to a leading industry research firm. In July, 2021, the IMF updated its global GDP forecast for 2021 for growth to a robust 6% and a further increase of 4.9% in 2022. U.S. GDP growth was estimated to improve 7% in 2021, Euro area increase 4.6% and China to rebound 8.1%. India is expected to see the greatest increase in GDP growth for 2021 at a revised 9.5%, albeit the recent impact of the Covid variant has softened this growth rate.

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 over 2,958 product tankers which range from 10,000 to 80,000+ dwt and aggregate over 161.2 million dwt as of June 30, 2021. Our area of focus, the Medium Range (or MR2) category, typically 40,000-55,000 dwt, consists of 1,591 tankers, representing 47.5% of total product tanker carrying capacity. MRs are considered the workhorse and usually operate in the Atlantic and Pacific basins. Customers include major integrated and national oil companies and international commodity trading firms. 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 of dry bulk and containerships have resulted in delivery slots for new tanker order being pushed into 2024.

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. Product tankers have an expected operating life of 25 years, but certain major charterers have lower age restrictions. A leading industry consultant estimated that MR2 orderbook was 6.8% (108 vessels) of the worldwide fleet as of June 30, 2021 and that only 40 MR2 ordered during 2020. Slippage in new build deliveries ran 12% in 2020. It also estimated 6.2% (or 99) of MR2s were 20 years or older. Product tanker demolition has not been significant over the last five years with a yearly average of 6 units. However, new restrictive and ever-expanding environmental regulations, current high bunker fuel prices, greater running costs of older tankers, current depressed chartering conditions and record high scrap metal prices, have increased demolitions. In fact, 22 MR2 were scrapped in the first 6 months of 2021 and this elevate pace may continue. We estimate that fleet annual growth for 2021 and 2022, net of vessel scrapping and delays in MR2 newbuild deliveries, to be approximately 2%.

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. 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.