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Gibson – Not Sold for Scrap

Weekly Tanker Market Report

One of the key developments in tanker supply this year has been a near absence of the demolition activity. During the 1st ten months of 2019 just 30 tankers over 25,000 dwt were reported sold for scrap. About half of all demolition activity has been in the Handy/MR size group, with 17 units removed since the beginning of the year. There were 3 Panamaxes/LR1s demolished and just 1 tanker in the LR2/Aframax size group. The count is marginally higher for larger crude carriers, with 5 Suezmaxes and 4 VLCCs sold for removals.

This is in stark contrast to developments last year, when over 150 units were scrapped. However, this year’s dramatic decline in numbers is not surprising, considering that the pool of prime candidates for demolition has been considerably reduced following intense activity in 2018. Weaker scrapping prices have also discouraged demolition, with lightweight values gradually falling from a high of $435/tonne in March 2019 to under $375/tonne in October, notably down from a peak of $465/tonne seen in early 2018. Throughout this year, there also has been less willingness from Owners to send tonnage for scrap as expectations were running high that the rebound in the market is just around the corner.

In addition to actual demolition sales, we have also observed an increase in VLCC floating storage demand in recent months, mainly for VLCCs around Singapore/Malaysia, as final preparations for IMO2020 got under way. According to our records, at the end of October 35 VLCC and converted VLCCs (FSOs) were involved in storage of crude, dirty petroleum products (including IMO2020 compliant bunker fuels) and clean products. Although this is quite a substantial number, the vast majority of these vessels have been involved in storage operations for quite some time.

A temporary spike in tanker earnings in October to their highest level in over a decade boosted Owners’ confidence and as such right now it is hard to find a solid argument to support a demolition decision. Moreover, scrapping activity is likely to remain at minimal levels over the next few months on the expectation that geopolitical uncertainty, seasonal strength in refining runs, weather related delays and the IMO2020 disruptions could support tanker earnings during the winter season. However, this situation could change as we progress into the 2nd quarter of next year. Although at present there is some optimism about the US/China trade talks, the evidence is mounting that the current state of affairs is already reducing the gains in world oil consumption and is likely to translate into sluggish growth in demand next year, keeping a lid on the potential rebound in tanker earnings.

In terms of tanker supply, nearly 110 tankers will be celebrating their 20th birthday next year, with figures being particularly elevated for larger crude carriers. Not all of these units will head for the beaches. However, trading conditions for ageing and inefficient tonnage will undoubtedly become more challenging, with the bunker base shifting to more expensive 0.5% sulphur fuels. This will add an extra cost on top of typical extended off-hire periods and higher maintenance & repair expenses. Furthermore, there are also tankers over 15 years of age that will have to renew their International Oil Pollution Prevention (IOPP) certificates and hence face the deadline for an expensive Ballast Water Treatment system retrofit next year. The choice whether to bite the bullet will be individual for every vessel. However, arguments to support the demolition decision will certainly have more weight.

Source: Gibson