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Analysis: VLCC demolition surges as freight market plumbs new lows

Insufficient poor earnings and oversupply of VLCCs during ongoing OPEC/non-OPEC oil production cuts have driven owners to send more tankers for scrapping. 

While only 10 and 2 tankers were scrapped in 2017 and 2016 respectively, this year so far at least 18 VLCCs have been scrapped which reflects the kind of unproductive market for tankers. And analysts have attributed this trend to ‘exceptional weakness’ in the spot market. 

Owners of older vessels up to 20 years or older find themselves at a greater disadvantage with heavy fuel consumption figures compared to more modern tonnage. 

Scrapping gets an added appeal to the shipowners particularly if an older vessel has a special inspection coming up and may require maintenance too, sources said. 

The difficulties the shipowners face have been explained by the shipbroker Gibson in a recent report: “Returns for aging tonnage have been under even greater pressure due to a typical minor rate discount, more waiting time between voyages and higher bunker consumption relative to modern and fuel-efficient tankers,” and he added: “The prospects for the spot market remain poor in the short term, suggesting that we are likely to see more tonnage heading for demolition.” 

As if to neutralize, this scrapping is taking place amid rapid VLCC fleet growth.

There have also been an additional 17 VLCC units ordered, almost on a par with the number set to go for scrap so the effect of this scrapping bonanza may be muted. 

The VLCC fleet has also seen extraordinary growth in the past two years and the order book makes up 15% of the current fleet. 

Falling crude inventories amid an oversupply of tankers does not bode well for tanker owners. 

According to data from shipbroker Affinity Tankers, there are 23 vessels in the VLCC fleet older than 20 years old and 42 VLCC ships older than 18 years old, and these will be all prime candidates for demolition if freight prices remain weak.

Freight rates plummet down sharply making the market depressive. 

2018 has been a terrible market for tanker owners especially for VLCC and Suezmaxes. 

Freight rates for VLCCs loading from the Persian Gulf have fallen sharply in the past year as the fleet has grown and OPEC cuts have reduced demand.

The average daily earnings for a VLCC on Persian Gulf to China voyage, which is one of the most active VLCC routes in the world, in 2015 was $15/mt, and this almost halved to $7.80/mt last year, according to S&P Global Platts data.

So far in 2018, daily earnings for a VLCC on a Persian Gulf to China route have averaged $6.47/mt. 

The outlook for freight rates also looks depressed in the near term, weighed down by fleet growth and ongoing production cuts by OPEC and non-OPEC producers.

Freight rates for VLCCs traveling from West Africa to China fell close to a 15-year low on March 3 when the VLCC route from West Africa to China, basis 260,000 mt, was assessed at $8.08/mt, the lowest since September 3, 2003, when it was assessed at $7.80/mt, S&P Global Platts data showed. 

Prices have since recovered slightly as Chinese refineries have completed maintenance and demand has picked up. Many owners are only just covering their operating costs and it still represents a very low earnings environment, which is driving many of them to consider scrapping older units, sources said.

 

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