The latest spike in the Aframax/Suezmax markets prompted by the temporary tightening of the Turkish Straits transit rules shows how quickly freight rates can rise from bust to boom and then ease back again. The industry has witnessed a number of similar spikes this year, both in crude and product tanker markets. However, putting aside this inherent volatility, returns so far in 2011 for all vessel sizes above MRs have been extremely poor, with the VLCC market particularly hard hit.
The rapid fleet growth over recent years combined with the ‘loss’ of around 4 million b/d oil demand because of the 2008/09 global recession has led to this situation. However, there has been a lack of new orders for products tankers since the recession started and we are now at the position where fleet expansion for products tankers will be limited over the next few years. Hence the prospects in this sector look more promising. In contrast, there is still a sizeable orderbook for VLCC/Suezmax tonnage and this is a major concern for owners. The anticipated removal of the remaining single hull tankers is unlikely to have any meaningful impact in reducing this oversupply as there are relatively few left and they have virtually no role in the spot market.
Given this, the only way the VLCC/Suezmax market will get to the same promising position as for products is if demand rises more sharply than forecast or if tanker supply is lower. With any upgrade in forecast demand highly unlikely, it is therefore down to supply. This can come about if not all the current orderbook gets built or if a significant amount of older double hull tonnage is demolished. The cancellation of new orders is an unknown, but we have already seen some double hull vessels being sent to the scrapyard.
However, so far this has focused on MRs and Aframax and not in the Suezmax and VLCC sectors, where owners need it most. In fact, in the last 2 years only 1 double hull VLCC and 4 double-hull Suezmax have been scrapped, compared with 67 MR/Panamax/Aframax.
There are currently very few double hull VLCC/Suezmax tankers over 20 years old, but there is a combined 139 (14% of the fleet) more than 15 years old. Although historically this has been considered as ‘too young’ to be sent to the scrapyard, it may be that low earnings coupled with fairly robust scrap prices are the ‘right’ conditions for a more speedy removal of older and/or the least efficient crude tankers. Whether this is a strong enough trigger for owners to scrap is questionable, but other factors may also come in to play, such as legislation on ballast water treatment.
If these measures are ratified then there will be the requirement for owners to invest in on-board treatment plants. The economics of this at a time of weak earnings may well be enough to push VLCC and Suezmax owners down the scrapping route. Either way, the demolition of older double hull tankers will be one good (and possibly necessary) way to help VLCC and Suezmax owners reverse their fortunes.
Source: GIBSON Tanker Report (www.eagibson.co.uk). 28 October 2011