Owners of older tankers face a dilemma. Tanker scrapping has been on the increase this year and in a recent interview, an executive from the demolition industry highlighted the main drivers for demolition in this sector.
These were freight rates forecasts, current scrap prices and the demolition activity in other shipping segments. Regulatory changes can also be a driver, particularly if there are significant rule changes on the horizon, Poten & Partners said in its weekly opinion piece.
For example, the phase out of single hull vessels between 1999-2003, pushed up demolition levels during that period.
At the moment, the requirement to install ballast water treatment systems and the IMO 2020 sulfur cap for bunker fuels are factors that owners need to consider.
Looking at each of these drivers to see how they may impact scrapping in the coming years, without regulatory mandates, the freight market has been (and always will be) the main driver for shipowners facing the decision whether to scrap a vessel or continue to trade it - not just the current market, but in particular the owner’s expectations for future earnings.
Tanker scrapping peaked in 1985 (at 10.5% of the existing fleet) after many years of dismal earnings had sapped owners’ confidence. Current spot earnings are also disappointing and are no doubt an important incentive for owners of older tonnage to consider selling their vessel for demolition.
Relative to modern vessels, older tankers frequently have to offer discounted rates to keep employed and still face lower utilisation, undermining their earnings even further.
However, unlike in the mid-1980s, earnings have not been very bad for very long and most owners don’t expect the market to stay depressed for a long period.
Other factors play a role. How about scrap prices? Do they really play a significant role in an owner’s decision? Historical data does not seem to bear this out. The two periods of elevated scrapping in 1992-1995 and 1999-2003 coincided with relatively low scrap prices.
The high scrap prices of 2004- 2008 occurred during the tanker super cycle, when scrapping was understandably low. Demolition picked up in 2009-2014, but that had more to do with the collapse in tanker rates after the global financial crisis than the relatively high scrap prices.
In general, scrap prices are hard to predict for owners and most assume flat scrap prices going forward. Obviously, owners will compare the scrap value with the resale value of a vessel and in challenging freight markets, the resale value tends to converge with the scrap value.
Other key factors that may drive tanker scrapping over the next few years are the new regulations around BWTS and low sulfur bunker fuels. The potential costs of these mandates present a dilemma to a shipowner faced with a special survey.
For example, the owner of a 2003-built VLCC needs to decide whether to take the ship through the next two special surveys (15 and 17.5 years) with combined drydock costs of around $4-5 mill. The installation of a BWTS could cost an additional $2-3 mill.
And then there is the matter of IMO 2020 deadline. Does the owner retro-fit a scrubber on his/her 15-year old vessel for $3 mill? An owner may have to, if he/she wants to be able to effectively compete post 2020.
Non-ECO vessels built in the early 2000s typically have a higher fuel consumption than modern tankers and if they need to burn expensive MGO starting in 2020, they may struggle to compete.
A simple calculation indicates that a 15-year old VLCC would need to earn at least $16-17,000 per day to break even. While that is entirely possible, the current freight market is about of half that rate.
Even if the owner has the cash to invest (banks may be reluctant to provide credit for this), he/she needs to be able to reserve a scrubber and schedule the installation to coincide with the upcoming drydocking.
Given the risks and uncertainties involved, one can also understand the owner who decides to scrap the ship instead, Poten & Partners concluded.