SHIPOWNERS are running out of time to address fundamental concerns about cost and fuel availability from midnight on December 31, 2019, when the global low-sulphur fuel regulation comes into effect.
Pressing questions over the price of compliant fuel, fuel availability and suitability remain unanswered, while abatement technology such as scrubbers remain expensive investments with a contentious future.
Shipowners are now tasked with adopting the right strategy and a ship’s age has an imperative role to play while making those important decisions.
Will we see a deluge of shipowners beating down the doors of scrapyards in Asia and Europe?
Lloyd’s List has estimated the number of older vessels that are the likely candidates for scrapping on the back of new sulphur regulations, using Lloyd’s List Intelligence and Clarksons data for both the dry bulk and tanker segments.
The average scrapping age has been assessed from historical demolition data and scrapping projections for the next two years are based on historically observed average age at demolition.
Average age at demolition has been reduced by two years for dry bulk and crude and product tankers and three years for liquefied natural gas and liquefied petroleum gas segments to indicate a possible rise in demolitions once new sulphur regulation kicks in.
The probable candidates for scrapping will be vessels approaching their third special survey, or more, in the next couple of years. Most likely these vessels could present the biggest dilemma for shipowners when preparing their assets for the new regulations.
Tanker owners are expected to continue the rapid scrapping of vessels, with momentum expected to pick up pace through to 2020.
In 2017, around 17 very large crude carriers were demolished, up from just two units in 2016, Banchero Costa data shows. So far this year, at least 15 VLCCs were sold for scrapping in the first four months alone.
Lloyd’s List estimates around 43 crude tankers and 40 product tankers could be retired by 2020.
Around 20 LNG vessels will have attained the scrapping age by 2019 and approximately 90 LPG carriers.
For the LNG sector, average age at demolition has been assumed to be 35 years, while for the LPG sector it is 30 years.
In mid-June 2018, the global dry bulk fleet consisted of 1,241 vessels above 18 years of age, with almost of half of them in the handysize segment. Most of these vessels are due for their special surveys in 2019 and 2020.
Lloyd’s List forecasts a potential 46% increase in scrapping due to tighter sulphur regulations from 2020, compared with the scrapping rate under usual business circumstances.
Still, these are vessels that have attained the average scrapping age and will only be phased out if they become uneconomical for the owners to operate.
The average age considered for scrapping for handysize is taken as 30 years, while for very large ore carriers it is 27 years.
With Chinese breakers out of the market, it is likely most of the dry bulk carriers will end up in either Pakistan or Bangladesh.
Economics plays a huge role in owners’ decisions over scrapping. Charter rates will need to support expensive low-sulphur fuels, or owners could opt to run more ships that consume less fuel.
The overwhelming majority of owners will likely wait until the latter stages of 2019 to draw up plans on whether to demolish vessels, particularly amid an improving outlook for the sector from analysts.
Return to boxship scrapping
Boxship demolition has slowed since the cull of boxships seen over the past two years declined earlier in 2018.
However, according to analysts at Maritime Strategies International, this could be about to change as IMO low-sulphur fuel regulations make older ships uneconomical.
“As the IMO 2020 deadline approaches, owners will make important decisions regarding ordering and demolishing vessels,” MSI said.
“We expect that contracting will increase in the coming years, peaking in 2020 in the near-term. We expect an additional increase in demolitions in 2022 due to a weaker demand environment and fleet ageing. The incentive to replace older tonnage with more efficient tonnage is clear as projected fuel expenditure rises.”
The process of fleet renewal, therefore, will take place over a number of years, and MSI does not believe there will be a sudden wave of mass vessel demolitions in a scenario where these vessels — even if old and relatively uneconomical — are still able to find employment.
“As newbuilding deliveries arrive over 2019-2022, however, scrapping will increase,” MSI said.
MSI expects around 315,000 teu to be sent to breakers in 2019, followed by approximately 465,000 teu and 335,000 teu in 2020 and 2021, respectively.
MSI’s forecast volume of demolitions is less than the record demolition volumes seen in 2016, but this is because it still expects a positive charter-market backdrop in 2020.
“We see scrapping as largely driven by the earnings backdrop, and this is especially the case for larger vessels, which act as the ‘swing providers’ of tonnage to the industry.”