Dirty tanker rates have extended their period of languishment in a prolonged slump that will be memorable in the future for both its severity and persistence. Continuing their performance from last year, dirty rates have at least found a support level thus far in 2013. This is little consolation, though, as it simply suggests that earnings are at or below owners’ marginal costs. Aframax spot rates have shown some resilience, and have demonstrated a generally positive, though mild, gain since the middle of last year. They are up slightly year-over-year.

Against the backdrop of record global oil demand, why are rates so weak? Ordering that took place in the latter part of the last decade and early part of this one is the main culprit. The orderbook exploded in response to rising rates, precipitating the current oversupply situation. The orderbook has since slowed, and some of these vessels may in fact end up trading clean as many are likely slated to be coated.
One thing that is curious about this past ordering behavior is that, despite the euphoric rate environment, newbuilds did not have as favorable project economics as one might initially think. The price of new vessels has historically been strongly correlated to time charter rates rather than proxies for the cost of the actual construction such as steel
prices. When newbuild orders were placed in hopes of capitalizing on elevated rates, much of the possible upside was already captured upfront by shipyards.

In conjunction with a slowing orderbook, the number of vessels headed for demolition has grown considerably since early 2011. A continuation of this trend would also help to rebalance the supply/demand dynamic that has gotten so far out of equilibrium.

The Aframax sector enjoys a fleet age profile that is more beneficial for rates than some of its crude oil-moving peers. In addition to the aforementioned slowing of the orderbook and acceleration of scrapping, the last spurt of ordering in the sector was slightly less aggressive relative to other sectors. The dirty Aframax fleet has a lower share of vessels under five years old and a higher share of vessels that would be candidates for scrapping based on their age.

Despite the depth of the current earnings malaise for Aframaxes, there is at least a plausible scenario for the sector to begin to recover. The versatility of the vessels, and the ability for there to be removals from the dirty fleet in order to trade clean, also enables the sector to heal more rapidly than VLCCs or Suezmaxes, for instance. While true that it will continue to feel the side effects of overbuilding across dirty sectors, a disciplined lack of ordering and a continuation of high rates of scrapping could provide the underpinning of a rate recovery for the fleet.