Tanker owners contemplating intensifying scrapping activity to alleviate oversupply issues

Recent tanker market developments, such as a growing competition among tanker owners for cargoes, coupled with the latest negative trends in terms of oil consumption and demand, as stated by the latest forecasts from OPEC and IEA, suggest that tanker owners should be thinking towards scrapping a larger portion of their older fleet.

This is what contemplates CR Weber in its latest report, where it mentions that thus far in 2011, the market has experienced several developments which, given a different trading environment, would have provided a major boost to tanker earnings:

• monthly Middle East VLCC spot-market cargo counts have reached 11-year highs,
• ton-mile demand growth has exceeded expectations, and
• orderbook slippage and cancellation rates have accelerated.

“The inability of these developments to drive the markets back into a true start of the recover stage has been apparent: overcapacity has reached levels at which in many cases the market is incapable of overcoming. The decision to layup vessels, which in other shipping sectors is a viable intermediate-term option, remains generally out of the question for tanker owners over fears of returning units to service following a period of disuse and implications for the vetting process of the remainder of their fleet.

The next most obvious solution to overcapacity is the exit option vis-àvis demolition markets. Demolition values, per lightweight ton, have risen some 9% since the start of 2011 and 109% since the 2009 trough to an average of $512 this week. However, with most remaining single hull units having exited from trading over the past 2 years, the pace of tanker demolitions has recently decelerated. Owners of elderly double hull units (some 11% of the Panamax-and-larger fleet is 15 years or older) are reluctant to consider demolition sales as an option implying that the present trend could continue. Indeed, only one double hull unit has been sold for demolition this year—this unit having been originally single hulled but converted to double hull in August 2008.

The case against progressing into demolition for the oldest units in the double hull fleet has thus far been logical. Most of these units carry no debt and can therefore elk out small profits, even in a recessed market—allowing owners to wait for further gains in demolition values. Moreover, with a number of offshore oil production projects scheduled over the coming 2 years, the prospect remains for further tanker-FPSO conversions to offer alternative resale options.

Mounting global economic uncertainty, however, poses fresh threats to this ideology. A double-dip recession would pose a significant threat to commodities prices, potentially eroding ton-mile demand growth and crushing demolition values simultaneously. Admittedly, it is still too soon to tell what direction the tanker global markets will take going forward and the affect this will have on tanker earnings. Thus, whether owners will start to eye demolitions markets more closely remains to be seen, but in the case where steel futures are strongly impacted and tanker prospects sour further, then this option could step in to provide a quick change to the supply/demand ratio” concluded CR Weber.

Meanwhile, in a separate report on this week’s demolition activity, Golden Destiny said that Bangladesh is still closed. “In the meantime, players of the industry are nervous with many cash buyers feeling ambitious for the official opening of the beaches till mid-August. India continues to take the large appetite of scrapping tonnage by offering prices excess $500/ldt, while some vessels are also heading to the scrap yards in China at levels offered excess $450/ldt. In Pakistan, prices are still low comparing to the best levels offered by Indian scrap buyers, but there has been some increased demand and with the month of Ramadan being ahead we may see some improvement in rates and more vessels coming in the shore.

The week ended with 12 vessels reported to have been headed to the scrap yards of total deadweight 717,968 tons. In terms of the reported number of transactions, the demolition activity has been marked with no change from previous week’s activity, while there has been a 29% increase of the total deadweight sent for scrap due to large size units sent for scrap in the bulk carriers and tanker segment.

Bulk carriers are still holding the lion’s share, 42% of this week’s total demolition activity. In terms of scrap rates, the highest scrap rate has been achieved this week in the tanker carrier sector by India for an aframax unit of 84,040 dwt “BEL TAYLOR” of 14,830 LDT at $575/ldt incl 900 tons of IFO remaining on board.

India has attracted 67% of the total demolition activity offering $525/ldt for dry/general cargo and $550/ldt for wet cargo, the highest levels seen from the 2008 fall. At a similar week in 2010, demolition activity was standing at similar currently levels, in terms of the reported number of transactions, 12 vessels had been reported for scrap of total deadweight 536 mil tons with only 3 bulk carriers scrapped and India with Pakistan offering the $410/ldt for dry and $440/ldt for wet cargo” concluded the shipbroker.

Source: Hellenic Shipping News. Nikos Roussanoglou. 11 August 2011

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