The hope of many tanker owners that the balance between tonnage supply and demand will even out on the back of increased demolition activity seems to fade away, as a report from BIMCO suggests that there isn’t much room for such a development. BIMCO mentioned that crude oil tanker tonnage in the size range from Aframax to VLCC is now recycled at the age of just 21, a level not seen since 1995. “The poor freight market   now increasingly impacts the segment of more mature tankers, effectively reducing the room for more demolition to balance the market. Moreover, the excessive demolition of crude oil tanker tonnage in recent years has reduced the fleet which is likely to exit the active fleet in near future for recycling to 2%. As the earnings across the board in the tanker market have been rather poor since 2009, the average scrapping age has fallen from previous highs. During the period 2000-2005 the average age of demolished tankers was at 26 years and is now, as said, down at 21 years” it mentioned.
Chief Shipping Analyst at BIMCO, Peter Sand, says: “The declining scrapping age of crude oil tankers reflects the tough commercial realities in the tanker market. The weak global economic conditions with low GDP growth rates in primarily the Western economies have lowered demand for tanker tonnage and offset the balance of the freight markets resulting in low earnings and tough trading conditions”.
The report contined by mentioning “the low earnings environment over the past 3 years have forced ship owners to sell tankers for recycling 4-5 years earlier than they did previously. This has cut deep into the expected commercial lifetime of a tanker. The shorter economic life of the assets is adding to the challenges presented by the low freight rates. Owners are now facing steeper and higher annual paybacks on loans and heavier depreciations weighing in on the Profit/Loss statements. This will go on until markets normalize with a better balance between demand and supply” said BIMCO.
In its outlook for the sector, the organization mentioned that “there is of course more to the estimation of the demolition potential than the simple age of a vessel. Despite any shortcomings on that regard, the age “method” is a tangible, fleet wide and commercially intuitive approach. For the sake of painting the larger picture, some other factors are relevant to consider. First and foremost, and according to VesselsValue, the current fleet holds 608 VLCCs. In the order book toady an additional 113 VLCCs are waiting to get built and delivered in future.
So far in 2012 only five VLCCs have been sold on the second hand market, and just two double hulled VLCCs have been sold for demolition market. This indicates pretty cold market conditions. In comparison 24 were sold in 2011. The number of active VLCCs built in 1997 and before is 88 – this is a relevant figure as they have special surveys coming up this year and coming years. A special survey may require a substantial amount of steel to be replaced and a potential bill of USD 3-5 million to be settled to secure on-going trading. Is this expense worthwhile to account for in current market? This is likely to be answered no when looking at the market prospects. The youngest VLCC that has been recycled during the current crisis was the M.T. Orion Trader, at 260,000 DWT, built in 1997 – sold for demolition in December 2011, at just 14 years of age. The vessel is likely to have experienced several operational deficiencies during trading prompting the early demolition. Put into the context of the horrific tanker market in first half of the 80’es, VLCC were sold for demolition at average ages of 11 to 12 years.
Meanwhile the recent demolition pace in the Aframax segment can be described as being in “high-stress” scenario (D) and the pace in the Suezmax segment as being in the “low-stress” scenario (C). This is leaving little, but relatively more room, for demolition to have an offsetting effect on oversupply, since the Aframax and Suezmax fleets have not been cut so deep yet as the VLCC fleet. However, as the percentage of the total crude oil tanker fleet that is estimated to exit the fleet is only around 2%, BIMCO concludes that the extensive demolition of obsolete tanker tonnage in recent years has exhausted most of the rebalancing potential for the supply/demand situation that could otherwise benefit the markets going forward.
The alternative to on-going trading and a second hand sale is a sale for demolition. According to VesselsValue the second hand value of nearly all VLCCs built in 1995 or prior to that is now below demolition value as estimated at 476 USD/ltd on the Indian Subcontinent.
These are all factors to keep in mind when making decisions about the future for the vessel.
The results of the analysis are pretty clear for the crude tanker segment – while the product tanker segment has shown a similar but less dramatic tendency” concluded BIMCO.
Nikos Roussanoglou, Bunkerports News Worldwide