Since the start of 2015, demolition in the oil tanker sector has generally remained very limited. However, in August 2017, more than 2.5m dwt was sold for scrap, the highest monthly total for fourteen years. A number of factors have supported the recent uptick, and there appears to be potential for scrapping to remain a more visible feature of supply side dynamics in the tanker sector in the coming years.
Soaking Up The Sun
Tanker demolition slowed to very subdued levels in 2015 and 2016, with just 2.1m dwt of oil tankers (10,000+ dwt) scrapped in each year, equivalent to less than 0.5% of the start year fleet in both cases. This compares to an average of 8.7m dwt p.a. and 2.7% of the start year fleet over the last 20 years. Limited scrapping in 2015-16 largely reflected the strong tanker market, with VLCC earnings averaging close to $65,000/day in 2015. In addition, the phase out of single hull tankers in the early 1990s and 2000s led to an accelerated ‘clear out’ of older ships, leaving a relatively young fleet and a limited ‘pool’ of demolition candidates. At the start of 2016, just 4% of oil tanker fleet capacity was aged 20 years or over.
However, tanker recycling has begun to pick up this year. While tanker earnings have been under pressure since mid-2016, the duration of the downturn is starting to take its toll, and in August 2017, 18 tankers of 2.5m dwt were sold for scrap (including four VLCCs), bringing the year to date total to 50 tankers of 5.9m dwt.
Higher demolition sales have partly reflected shifts in tanker prices; the weaker earnings environment has depressed secondhand tanker prices, whilst improving steel price levels so far this year have supported scrap values. At the end of August, the estimated scrap value for a VLCC stood at $16.9m (up from $12.6m at the end of 2016), equivalent to 79% of the guideline 15 year old secondhand price of $21.5m (down from $24m at end 2016). This was the highest ratio since late 2013.
Turning Of The Season?
Looking ahead, the consensus appears to be for the crude tanker market at least to remain under pressure into 2018. Further demolition sales are likely if secondhand prices of elderly tankers remain close to scrap values, and while the oil tanker fleet aged over 20 years is still relatively limited, around 18% of fleet capacity is aged 15 years or above, indicating a potential increase in the number of scrap candidates in the coming years. New environmental regulations are also likely to play a role in driving increased demolition volumes, potentially at younger ages, in the future.
So, tanker recycling has recently picked up, and there seem to be supportive drivers of more elevated levels of recycling going forwards. Continued scrapping at August’s pace would go far to offset expected oil tanker deliveries of 36m dwt this year, and 28m dwt in 2018. However, scrapping volumes are volatile, and demolition has already slowed in September. While a new season of tanker recycling may have started, it remains to be seen to what extent this might continue and help form a new tanker supply climate.