Scrapping is Necessary for a VLCC Recovery
VERY large crude carrier spot rates had another week of dismal earnings, triggering more interest in ship recycling markets in which rising demolition rates are closing the gap between vintage tonnage and scrap values.
According to MANA, The benchmark VLCC time charter equivalent on the Baltic Exchange slipped further to $706 per day on Friday’s close, down from $966 per day a week earlier. Spot TCE from the Middle East to Japan had fallen as low as $8,245 per day on August 31 before edging up slightly to $8,498 per day, still down 4.9% on week.
Spot VLCC freight rates have fallen so far below operating cost that market participants are looking at the uptick in demolition rates with interest.
In the first six months of 2017, only eight tankers, accounting for about 1.2m dwt, were scrapped, out of which only one vessel was a VLCC, according to Bancosta Research.
But this could change, with scrapping rates becoming more attractive. Demolition rates for tankers have risen to the highest in the past year at about $400-$415 per ldt, according to shipbrokers.
For now, VLCC owners are on the cusp of having to decide whether to prolong the life of older vessels or send them to the junkyard. “The option premium to sit and wait for a recovery is at a record low, with market values just above scrap prices,” DNB analyst Nicolay Dyvik said.
“We reiterate our view (held since March 2016) that 2017-2018 will be challenging for crude tankers. We see more risk of a weak winter season given the current oversupply and US refinery outages lowering crude demand,” he added.
As of Sunday afternoon, nine oil refineries in the US Gulf Coast region remained shut, equal to 12.7% of total US refining capacity, out of which seven refineries were trying to restart, according to the Department of Energy.
“This process may take several days or weeks to start producing product, depending whether any damage is found during restart,” it said, adding that at least four other refineries in the Gulf Coast region were operating at reduced rates equal to 7.2% of total US refining capacity.
That is nearly one-fifth of total US refining that is shuttered.
VLCC owners have reportedly ballasted to the Caribbean in the hope of benefiting from higher rates, and on expectations that pent-up exports of US crude oil will emerge when ports on the Gulf Coast reopen. It remains to be seen how the situation on the US Gulf Coast will play out for crude tankers.