Scrapping of the largest tankers already triple 2017 volume, more likely to go

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.

VLCCs – Very large Crude Carriers can carry 2 million barrels of crude oil

So far this year 32 Very Large Crude Carriers (VLCC) have been sold to ship breakers compared to just 11 units in all of 2017 and at prices not seen since 2015, according to London shipbrokers Gibson’s latest tanker market report.

The total number of VLCCs in crude floating storage has also declined dramatically this year, with just two VLCCs engaged in crude storage, versus on average 27 VLCCs per month in 2017, Gibson said.

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. Out of those scrapped, four VLCCs were on storage duties throughout 2017, while over a dozen of other vessels were also involved in some sort of temporary storage, typically lasting somewhere between 2 to 6 months at a time. The majority of those ships previously used for oil storage have resumed trading, adding back tonnage supply to the market, though three former VLCCs which had been converted and used for storage projects were sold for permanent removal.

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.

Some younger Iranian tankers could also return to floating storage after the US reimposes sanctions on the country, although these ships at present cannot compete for international cargoes.

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.

Weighing on hopes of a VLCC market improvement is the nearly 25 additional ships scheduled for delivery this year as well as a further 60 units during 2019. Fleet growth may be restricted if demolition activity remains robust, concludes Gibson.