The worst market since 1990 is creating a fleet of unloved, and possibly ship recycling yard-bound tankers
According to Cleaves Securities’ latest Shipping Weekly, VLCC owners saw average earnings for non-eco tonnage drop into negative territory for the first time since its records began in 1990.
Although similar reports were voiced earlier this year, Cleaves qualified the injuries being taken in the VLCC sector. It notes that the VLCC base rate of negative US$886 per day is for a generic non-eco, non-scrubber 2010-built VLCC.
This is no longer representative, noted Cleaves, as 49% of the 775-strong VLCC fleet is eco specification, 40% have scrubbers installed and over a quarter (28%) are both eco specification and equipped with scrubbers.
The premium for an eco-specification VLCC is US$5,485 per day and the premium for a scrubber-equipped VLCC is US$5,112 per day. Therefore, the eco-specification, scrubber-equipped VLCC is earning around US$9,700 per day versus the negative US$886 per day of the generic and standard VLCC.
However, break-even is estimated to be US$24,000 per day.
The crucial difference is that the opex of the older, generic VLCC is around US$9,500 per day versus around US$6,500 per day for the modern eco-specification VLCC.
Therefore, the older standard VLCC will be draining resources faster than new tonnage: the new marginal tonnage is making a bad situation worse for the less-attractive VLCCs.
Under such circumstances, tanker recycling should be on the rise. Shipbroker SSY notes that scrap steel prices for tankers are at a two-year high of US$445 per ldt, but numerically only half the number of tankers (six) have been removed from the fleet in January and February 2021, compared to the 12 in the same period of 2020.
One reason is the continued healthy demand for older tanker tonnage, despite the poor or even negative earnings profile noted by Cleaves.
Compared to the last surge in tanker scrapping (March 2018), when the price differential between a 15-year-old VLCC and the sale for recycling price was around US$4.8M, the current differential is over US$11M.
SSY does not see the scrapping pause continuing. The cushion of earnings built up in early 2020 will dissipate as the older, standard design, non-eco, non-scrubber tonnage loses out to the modern tonnage. And older vessels face special surveys where steel renewal and retrofits of ballast water treatment systems and possibly scrubbers become part of the evaluation process.
According to SSY’s Digital Analysis data, there are 13 VLCCs, nine Suezmax, eight Aframax/LR2 tankers and 32 MR product tankers due for fifth/20-year special surveys in 2021. These are all scrapping candidates in a weak freight market with rising scrap prices.
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