In common with most tanker sectors, the VLCC market is enduring severe oversupply, with deliveries outpacing dwt demand growth. However, con-ditions in the sale and purchase and demolition markets have prevented significant rebalancing of the fleet. Can't Scrap, Won't Scrap The VLCC fleet is projected to reach 187.6m dwt by the end of 2012, an increase of 6.8% y-o-y. However, VLCC dwt demand is projected to increase by 4.8% y-o-y. Despite this imbalance, demolition levels have remained relatively low. Only 5.1m dwt of VLCCs have been scrapped since January 2011, as shown by the Graph of the Month. By contrast, 21.4m dwt of Capesizes have been scrapped in the same period. A number of factors have prevented greater VLCC scrapping levels.
Holding Out for a Hero
Following the Erika incident in 2001, the IMO revised its MARPOL regulations regarding the single-hull tanker phase-out, mandating such tankers to stop trading by 2015. This process had largely been completed by 2011, significantly reducing the fleet’s average age (8.3 years in comparison with 11.6 in the bulker fleet). In the absence of a surge in demand, owners would have to scrap younger ships to reduce ship supply.
However, between January 2011 and October 2012, the 15 year old VLCC price remained consistently above the scrap value, with the differential between the two on average 15% higher. Therefore, owners seeking to divest tonnage have looked to sell middle-aged vessels, rather than resort to scrapping, as the phase-out meant that more elderly vessels had already been removed. Further, tanker sales for conversion into FPSOs have helped to hold up secondhand prices. Only 3.1m dwt of 13-17 year old VLCCs having been scrapped since January 2011, as many owners have preferred the better returns offered by the second-hand market.
Steeling Themselves
The further decline of the VLCC freight market in 2012 may have initiated an increase in scrapping, particularly when the differential between the 15 year old sale price and the scrap value reached zero in July 2012. However, Asian steel prices declines were a key factor in the resumption of the differential in August 2012. Following the decline in Chinese steel plate prices by 33% y-o-y in September 2012, scrap steel prices in the Subcontinent declined from $500/ldt in August 2011 to $396/ldt in September 2012, reducing the amount Indian shipbreakers could get for their scrap. Thus, the scrap value has been driven downwards faster than the 15 year old price, with the differential between the two standing at 22% in October 2012, its highest level since March 2011.
The scrap value and the 15 year old asset price differential has created a buffer to further scrapping. The phase-out removed the majority of elderly tonnage in recent years and, despite the difficult supply-demand balance, the market continues to value ships of around 15 years at a premium over the scrap value. In these conditions, until the differential between the two prices closes, the economic imperative for owners to demolish middle-aged VLCC tonnage will remain weak.