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
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
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
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.