Owners are expected to continue the rapid scrapping of tankers, with the volume accelerating in 2019 and a “deluge” of tonnage being torched in 2020, according to a report from Alphatanker.
Some 74 crude tankers above 34,000 dwt were removed from the fleet in 2017 and the momentum is expected to continue this year, it said in a report.
Scrap prices should remain high, driven by a dearth of other ship types sent for recycling and government-imposed controls on Chinese steel production.
With tanker markets expected to remain “challenging”, Alphatanker has predicted 94 vessels will be recycled by the end of 2018.
Data pointed to 16 ships having been removed intentionally from the tanker fleet during January, maintaining last year's momentum.
In 2017, crude carriers accounted for almost two-thirds of the 74 tankers scrapped, but only 25 clean units were recycled. The tally was against the backdrop of an armada of new deliveries and deteriorating freight rates, coupled with rising scrap prices that Alphatanker said now exceeded asset prices for 20-year-old tankers.
Last year’s increased scrapping compared with a total of only 52 tankers of 34,000 dwt and above being recycled in 2015 and 2016.
Euronav chief executive Paddy Rodgers said that the 22 suezmaxes and VLCCs taken out of the market in the second half of 2017 was the highest level since 2003.
"Why this change? One of the key drivers has been the rising and volatile scrap price," he said in a conference call with investors. "Volatility is important as the dynamics prevent complacency — take the scrap price now, or it may not be there tomorrow."
Alphatanker noted that scrapping tends to be cyclical, with cycles lasting several years. Hence, its expectation of another busy year followed by even bigger numbers in 2019 “driven by an avalanche of new regulations”.
First up is the Convention for the Control and Management of Ships’ Ballast Water and Sediments involving the compulsory installation of ballast water treatment systems, at a cost of up to $2m depending on vessel size.
Existing vessels are exempt but must from 8 September 2019 install the systems at their next five-year special survey.
The business case for an older vessel is not “convincing”, said Alphatanker, which put the price of a 15-year-old VLCC at about $23m.
However, Alphatanker said the most important driver for scrapping is the global 0.5% cap on the sulphur content of emissions which enters into force on 1 January 2020.
Analysis by broker Barry Rogliano Salles indicated that from that date the vast majority of tankers will use compliant fuel — marine gasoil or ultra-low sulphur fuel oil — rather than install scrubbers.
Alphatanker expects both fuel types to be “significantly more expensive” than high-sulphur fuel, leading to a shift of interest in vessel fuel efficiency.
Inefficient tankers could become a “millstone” around owners’ earnings, with likely scrapping candidates being those ships engaged in long-haul trades.
“On the flip side, the only inefficient tankers we expect to survive are those engaged in niche short-haul trades, such as calling at Iranian ports,” said Alphatanker.
With a “large amount” of inefficient tonnage heading for recycling in 2020, scrap prices are then expected to come under pressure from oversupply.
Consequently, some forward-looking owners could scrap early. “Our projections, therefore, suggest an acceleration of scrapping in 2019, followed by a deluge in 2020,” said Alphatanker.
In summary, the consultancy said medium-term tanker scrapping is here to stay and tighter-regulations will help modernise the fleet and improve efficiency.
Freight rate pressures could ease but much depends on how owners react and whether they decide to order fuel-efficient vessels.
