NASDAQ PXS 1.10 +0.02 +1.38%
Volume: 46,453 January 21, 2020

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 the ever-growing 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 growing demand globally for transportation fuels. In July 2019, the IMF updated its worldwide annual economic growth forecast to 3.2% for 2019 and 3.5% for the following year. In September, the IEA updated its estimate for crude oil demand growth for 2019 and 2020 to 1.1 and 1.3 million barrels per day, respectively. Reasonable economic activity and moderate prices for refined products has resulted in solid demand of transportation fuels. Positive supply/demand fundamentals and upcoming new IMO regulations on fuels should result in sustainable improvement in product tanker rates starting Q4 2019.

The United States, Europe, India and Middle East are the largest exporters of refined products, accounting for just over half of total exports. Refining capacity, domestic demand and worldwide arbitrage opportunities can influence the movements within these regions. Global shifts in refining capacity and the increase in U.S. crude oil production, led by the rapid expansion of shale-based oil, are positives for demand of product tankers. In addition to meeting its growing internal needs, China has become a sizeable exporter of refined products as its seaborne trade has increased at a compound annual growth rate (“CAGR”) of 10% from 2008 to 2018. 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. Non-OECD refineries now account for over 53.2% of global capacity. Overall, seaborne trade in products has grown at a CAGR of 3.2% between 2008 and 2018, rising to 1,050 million tons, while ton mile demand over the same period had a CAGR of 3.5%.

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 2,800 product tankers which range from 10,000 to 80,000+ dwt and aggregate over 153 million dwt as of August 30, 2019. Our area of focus, the Medium Range (or MR2) category, typically 37,000-55,000 dwt, consists of 1,706 tankers, representing over 60% of total product tanker carrying capacity within this group. 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.

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 availability at the yard, age of the existing fleet and cost and availability of funding. Product tankers have an expected operating life of 25 years, but certain charterers have lower age restrictions. A leading industry consultant estimates that MR2 orderbook was 5.9% of the worldwide fleet as of September 2019. It also estimated 6% (or 102) of MR2s were 20 years or older. While product tanker demolition has not been significant over the last couple of years (only 24 MR2s in 2018), new restrictive environmental regulations should increase scrapping in the near term. Fleet growth for 2020, net of vessel scrapping and delays in MR2 newbuild deliveries, is estimated to be less than 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.