Ordering at the Peak: A Freight-Rate Reality Check

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The Newbuild Trap

There's a version of this cycle that owners have lived through before, and it always starts the same way: rates go vertical, yards fill up, and everyone with a checkbook starts ordering ships they won't take delivery of for three or four years. I want to walk through why one should ignore that instinct and look at why the more interesting opportunity is in the adjacent market now, the secondhand market.

Let's start with how extreme this actually is

VLCC spot earnings closed July at $223,340/day. Suezmax wasn't far behind at $209,325/day. LR2s hit $135,472/day. These are the direct output of a Middle East conflict that has choked transits through the Strait of Hormuz and, more recently, spilled into the Red Sea. Our own market commentary this month describes owners "reluctant to commit" and charterers unwilling to lock in term business, which tells you everyone closest to the market doesn't believe this is the new normal either.

Here are some numbers that should anchor every capital allocation decision being made right now. Major VLCC owners have disclosed 9-10 year average VLCC earnings of about $35,000/day. Today's spot rate is 6.4 times that average.

The same pattern holds further down the fleet. Today's LR2 spot rate of $135,472/day is 5.9 times the 10 year average of about $23,000/day while 10 year MR average is $16,241/day, one third against today's MR Atlantic spot of $46,472/day.

Newbuild prices are already pricing in the mania

While everyone's fixated on freight, asset prices have moved just as hard. Comparing our April and August Term & Sales Reports, VLCC newbuild resale values rose 5% from $160 million to $168 million in four months. Every other segment moved similarly, Suezmax up 5.8%, LR1 up 7.7%, even MRs up nearly 4%. That's the market pricing in the assumption that today's freight environment persists, which is exactly the assumption a newbuild order requires you to make, for years, before the ship even touches water.

JP Morgan's latest VLCC pair at Hanwha Ocean, priced at $131 million each, won't deliver until 2030. Mingsheng's four VLCCs at Jiangsu New Hantong in 2029–30, CMES’s five Aframax/LR2 units at DSIC deliver in 2029 and Asyad's six MRs in 2029.

The math doesn't survive contact with history

We modelled the numbers, including financing and operating costs, a 75% loan-to-value structure, and a 20-year amortization. At today's spot rate, a VLCC newbuild pays back its full cost, equity plus every dollar of interest in about two and a half years. Compelling, on paper. However, run the levered payback scenarios and the risk shows up.

Levered/equity payback. At today's spot rates, every deal pays back its 25% equity slice in under 0.5 to 1.2 years. Which is exactly why capital keeps flowing in. But apply the genuine 10-year average rate and the picture inverts completely, where current VLCC deals essentially sit at breakeven or just above the historical 10 year average. LR2/Aframax/MR deals never recovers equity at all. At the long-run average, several of these vessels can't even generate enough cash to service their own debt, let alone return the owner's capital.

Full payback (equity plus every dollar of interest paid over the loan's life) tells the same story with less shock value but the same conclusion. The newbuild order book, in other words, is being underwritten on something well above the historical average, closer to the current 3-year time charter

Cycles in this business don't fade gently. They have a tendency to crash.

Secondhand is the trade that doesn't require the cycle to cooperate

Our own August report recorded the 2016-built Suezmax GH Holiday changing hands for $85 million, 23% cheaper than a new Suezmax resale at $110 million with nine years of remaining earning life immediately at whatever rate the market pays the day the buyer takes delivery. No yard queue, no multi-year bet on where the cycle sits in 2029.

Even the 2004-built VLCC Eclat found a buyer at roughly $50 million, confirming the market is strong enough right now to support 22-year-old tonnage.

What discipline actually looks like in this order book

Not every newbuild order in this cycle is reckless. Mingsheng's four VLCCs came with a 15-year time charter at $43,000/day, well above the $35,000 historical average, locked in for most of the vessel's economic life. Asyad's six MRs came with a 5-year charter. These owners aren't betting on the spot market holding, they are transferring the freight risk to a charterer at a rate that clears the historical average, and letting someone else carry the downside.

For everyone else ordering uncovered tonnage into 2028–2030 deliveries, the vessel you're buying will very likely be earning something much closer to $30,000/day than $220,000/day by the time it's wet. Price it and finance it accordingly.

This piece reflects Vantage Research’s market observations based on publicly available data and the company's own Term & Sales Report research. It is not investment advice and should not be construed as a forecast of future freight rates or vessel values.