Over the course of 2017, VLCC tanker values exhibited price depreciation for the second consecutive year, as the market fundamentals put pressure on earnings. Newbuilding contracts averaged US $82.8 million (basis Korea/Japan), a decline of 8.5% from 2016 average values; however, the second half of the year is pointing to a firmer market as yard capacity remains constrained and owners, backed with charter coverage, look to capitalize on the lowest annual prices since 2003 (Figure).

In 2017, 5-YR old tankers averaged US $60.5 million experiencing pricing pressure through the year, with a low of US $56.5 million recorded in February. On a year-over-year basis, this represented a 12.0% decline from 2016 levels. The 10-YR old tanker depreciated at a similar pace, falling 11.6% in the year, averaging US $40.9 million

In January 2017, we called for Newbuilding values to average US $82.0 million, with our projections falling only 1.0% below actual levels. Our 5-YR old vessel forecast of US $59.0 million (annual average value) was 2.5% below the actual recorded average value of US $60.5 million. The 10-YR old average value of US $40.9 million in 2017 was 5.8% above our original forecast.

Historically, our data shows that the price of a 5-YR old VLCC trades at around 79% of the Newbuilding contract value. In 2017, this ratio fell to 73% as weak earnings pressured the secondhand market more vigorously. In 2018, we expect 5-YR old values to account for 72% of a Newbuilding value, while the 10-YR old price should increase to 50%, below the long-term average of 57%. With scrap prices projected to remain at around US $16 million, our 10-YR price forecast of US $43.5 million, indicates that the scrap ratio will remain about 10% higher than the long-term average.