VLCC Demolition at Low Levels in 2021 Despite Weak Rates
Despite more than a year of low freight rates in the oil market, tanker owners are continuing to hold on to their VLCCs even avoiding the temptation of skyrocketing steel prices offered in India, Bangladesh, and Pakistan. According to a new analysis from the shipping association BIMCO, shipowners are delaying and deferring disposing of older VLCCs (Very Large Crude Carriers) despite the potential of a prolonged slump in freight rates and the uncertainty if future waves of COVID-19 will depress demand from one of the world’s largest oil importers, China, and other major import countries.
“The low demolition level seen in the first seven months of the year for crude oil tankers surely takes some by surprise. Some are wondering why shipowners are not demolishing the excess fleet when freight rates have been sluggish for the past year,” says Peter Sand, BIMCO’s Chief Shipping Analyst.
According to the analysis, with weak rates both in the freight market and demand for floating storage, freight rates are averaging just over $2,600 per day in 2021. BIMCO notes that $25,000 per day is normally required to break-even operating a VLCC.
Yet, during the first seven months of 2021, BIMCO reports that only three actively trading VLCCs have been sold for demolition. In addition, five retired VLCCs working as Floating Storage and Offloading units (FSOs) in recent years have been demolished. However, as they are not actively trading, the demolition of those five vessels did not impact the demand-supply imbalance reflected in the low freight rates.
Comment on the current demolition rate of VLCCs, Sand believes “the reason behind this is two-fold. Firstly, the strong earnings enjoyed by everyone in the crude oil tanker shipping sector last year leaves no owner short of cash. Secondly, as secondhand prices exceed even the record-high prices offered for demolition steel, shipowners are more inclined to keep their tankers afloat and changing hands, rather than sending them to the demolition yards.”
The lethargic pace of VLCC demolition is partially explained by attractive prices for older ships in the secondhand market. According to VesselsValue, 69 VLCCs have changed hands between January and -July 2021, compared with 91 for the full year of 2020.
“To some extent, what we see now is like what we saw in the period that followed the six quarters of high oil tanker earnings from Q4 2014 through Q1 2016,” says Sand. ”Following this it was not until Q3 2017 that we began to see a pick-up in demolition for VLCCs.”
Time has proven that it takes time for shipowners’ demolition decisions to mature and that a weak market right in the wake of a strong one is not enough to take the final step and go for demolition. BIMCO, however, cautions that nothing is straightforward in these markets citing the fact that demolitions of oil product tankers are heading for a record-high level in 2021.