Does First VLCC Sale in 18 Months Signal Beginning of Demolition Wave?

With no sustained recovery in the oil markets and tanker rates, there have been forecasts that it could lead to the first significant culling for the sector and specifically VLCCs in a prolonged period.  

It had been nearly 18 months since a VLCC was sold for scrap and despite predictions that owners were preparing to dispose of older tonnage, it was the fourth-longest streak of zero VLCC demolitions in history according to the shipping association BIMCO.

The first VLCC, the former Zoya 1, an almost 25-year-old 300,500 DWT crude oil tanker, has now been sold for scrap breaking a streak that lasted 512 days according to BIMCO. The last VLCC to be demolished was the 300,361 DWT Watban which was scrapped in Bangladesh in June 2019.

The circumstances of this sale, however, continue to provide a reason for doubt that the shipowners will rush to dispose of tonnage. The Zoya 1, recently renamed Sam, suffered a fire tragically killing several crew members while undergoing maintenance last January. Previously, the ship had spent several years at anchorage as floating storage in United Arab Emirates waters. 

Now that the first VLCC has been sold to be demolished, BIMCO questions whether it was a one-off, or whether it has opened the flood gates. The speculation is whether more owners will choose to demolish their older tonnage, as a return to profitable rates is not currently on the horizon. Also contributing to this are reports that scrap prices have begun to rise especially in Asia.
 
“The age and trading pattern of the ship in the past few years made the Zoya 1 a prime candidate for demolition, but there are plenty of other candidates that could follow,” says Peter Sand, BIMCO’s Chief Shipping Analyst. “These ships may have been kept active when they found employment at profitable rates, either for active trading or floating storage, but with the poor outlook, there seem to be little incentive to keep these ships sailing once their contracts expire,” 

Following the frontloading of demand for tanker shipping in the second quarter, as cheap cargoes flooded the market, BIMCO believes crude oil tanker shipping now faces challenging times ahead. They highlight that the current rate for a VLCC is less than half the average daily cost for the owners to cover financing and operating costs.

Further, since the last VLCC was demolished, BIMCO highlights 42 have been delivered. The new vessels added 12.8 million DWT to the combined VLCC fleet. Total capacity, according to BIMCO, now stands at 255.3 million DWT.

Time will tell if the sale of the first VLCC in nearly 18 months was a one-off due to unique circumstances or if the current economic pressures will lead to the expected but so far culling of the fleet.