Will Scrap Yards Solve the Crude Tanker Glut?

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Depending on when and where one looks, day rates for very large crude carriers (VLCCs) run between $8,000 and around $20,000. The sad fact is that break-even rates for these massive ships range between $30,000 and $40,000 a day, according to ship brokers in Singapore and London.

This appears to be a classic case of supply exceeding demand, and the result is that more VLCCs are being sent for scrap. Low day rates, however, may be just one part of the problem for ship owners. Another is OPEC’s agreement to continue restricting production, further limiting demand at least through the first half of this year.

New regulations regarding ballast water treatment and sulfur content in bunker fuel also may be forcing more owners to scrap older ships rather than bringing them into compliance with the new rules. Further encouragement for sending ships to the scrap yard comes from the rising price of scrap.

Last year, the demand to transport crude oil rose by 5.4% and led to a 4.9% increase in the number of VLCCs available, according to McQuilling Services. Net fleet growth through 2022 is forecast at 155 “dirty” (i.e., crude oil) tankers, of which 72 are VLCCs. A total of 24 VLCCs were removed from service in 2017. Net new VLCC orders totaled 19 in 2016 and 51 in 2017.

According to a report from GMS, the world’s largest cash buyer of ships, nearly 10 VLCCs already had been sold or beached for 2018 as of Thursday. Pakistan, one of the major locations for ship scrap yards, reportedly has lifted its ban on tanker imports, and that would tend to weigh on scrap prices as well.

According to shipping research firm Poten & Partners, a 15-year-old VLCC has a second-hand value of around $23 million and a scrap value of $18 million to $20 million. Scrapping the old VLCCs will help, but new deliveries for this year and next are expected to total 85 new vessels. To support that growth, more crude oil, not less, is going to have to be put on the water.