Aggressive Tanker Scrapping during 2018

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(Image Courteys: Tanker Shipping & Trade)

Tanker scrapping started in 2018 with a bang, as a combination of low freight rates, high scrap prices, an aging tanker fleet, and the impact of upcoming vessel regulations combined to create a feasible environment for scrapping.

Companies around the world have scrapped a record number of large crude tankers in 2018. A prolonged bear market for crude oil tankers have resulted in the deletion of triple the number of ships sold for scrap, compared to last year.

About 100 vessels of the industry’s main crude carriers have been sent to India and Bangladesh for demolition, according to data from Clarkson Research Services Ltd., the statistical and research service arm of the world’s largest shipbroker.

As of September the vessels, which transport 40 percent of the world’s crude, were on course for the worst charter rates in three decades. In an August report, Bloomberg stated that the implosion of charter rates was due to a two-year reduction of OPEC cargoes and environmental regulations.

Morgan Stanley estimates the global fleet of large crude carriers could lack 100 million barrels of transportation capacity in the first half of 2020. “It prolongs the period of profitability after the turnaround,” said Fotis Giannakoulis, a New York-based shipping analyst at the bank.

“The more you scrap, the more you bring the recovery forward and accelerate its speed. The market will strengthen with high scrapping even with smallest growth in demand.”

In other words, today’s scrapping of vessels is seen as a deleveraging period to clear excess and rebalance the industry.

Average earnings for 2 million barrel-hauling VLCCs crashed by 65 percent to $6,159 a day in 2018, the lowest since the financial crash according to data from Clarkson. They were $17,794 for all of last year, $41,488 for 2016 and $64,846 in 2015.

For companies who did not scrap, rates recently moved higher more threefold from late September to mid-December, according to Clarkson figures.

“What those demoralized owners perhaps failed to foresee was a sudden surge in cargoes. With the U.S. poised to impose sanctions on Iran earlier this year, producers including Saudi Arabia and Russia began adding barrels to the market.

The number of VLCC removals have so far exceeded deliveries of new buildings as just 26 VLCCs have entered the market between January and August. Gibson points out however, that some of the tankers reported for demolition had been absent from the trading market for quite some time, while for many others trading opportunities were limited.

Between May and November, the world’s largest and second-largest exporters lifted their combined output by about 1.5 million barrels a day. American shipments are also soaring. As well as adding demand for vessels, the increased oil supply also drove down fuel prices — the industry’s single biggest expense.

Up in the North Sea, ships that move 600,000-barrel cargoes earlier this week were earning $72,664 a day, the highest in 3 1/2 years, according to data from the Baltic Exchange in London. At the start of December, giant 2 million-barrel carrying vessels were making $58,000 from delivering Middle East oil to China, the most since at least the start of 2017. West African rates also surged,” said Bloomberg.

Regarding transportation capacity, this year has been the most substantial scrapping period of crude vessels since 1985. The end of year surge in charter rates does not mean owners were wrong to demolish; it is quite normal to clear the excess vessels to rebalance the industry.

US tanker brokers Poten and Partners notes in a recent report that the threat of sanctions on Iran has been very effective. Iranian exports have started to decline several months before the deadline with average exports of of 2.35 million barrels per day (MB/D) by tanker in the first 5 months of 2018 dropping to an estimated 1.77 MB/D in August. Poten adds that Korea seems to have stopped Iranian imports completely accounting for about half of the decline in Iranian exports and Japanese imports have been reduced as well. Both India and China have also reduced their Iranian crude purchases.

The trading fleet is ageing however, and more vessels could be sold for scrap this year, given the high scrap prices being achieved and the poor returns from the market. A total of 55 vessels in the existing VLCC fleet were built in 2000 or earlier says Gibson, adding that due to their age profile, low industry returns and limited trading opportunities, these tankers are the most vulnerable to demolition pressure in a run up to 2020 when the introduction of a worldwide ban on high sulphur bunker fuel would make the ships uneconomical. An older VLCC will burn close to 70 metric tonnes of heavy fuel oil per day for propulsion.

The recent increase in scrapping was anticipated, however the volume of vessels scrapped has exceeded all expectations. This elevated scrapping should be a positive for the tanker market as we move through 2019. The recent increase in scrapping was anticipated, however the volume of vessels scrapped has exceeded all expectations.

(References: Bloomberg, Oil Price, Freight Waves, Gibson, Teekay)

Sea News Feature, January 7