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Wednesday, January 17, 2018

CONTINUED HIGH DEMOLITION ACTIVITY THROUGHOUT THIS YEAR

“Continued high demolition activity throughout this year,” says P.F. Bassøe Shipbrokers, who ask whether the improvement in rates end January “is a short-lived party for the owners”.

Bassøe sees a possible change of mentality among owners of mid 70s built VLCCs. Adverse market conditions, combined with prohibitive bunker prices, have stimulated demolition activity. The abundance of tonnage has resulted in charterers not preferring HBL tankers.

Bassøe says that the “ERIKA” pollution incident off the French coast has further highlighted the oil companies’ inherent public relations risk in connection with chartering of old tankers. The French government has put pressure on French oil companies to employ tankers of 15 years of age and below, with national flag only. The request to only charter national flag vessels seems to be unachievable given the traditional corporate structure of international shipping. But an age limitation is in line with the stricter chartering requirements now being introduced by other oil majors. Exxon Mobil has now introduced an “SBT rule” as a very strong preference when chartering tankers. If applied rigorously, the rule will cut out large numbers of 70s built tonnage. BP Amoco has already introduced a new rule for vessels without a CAP rating: For tankers up to 100,000 dwt an age limitation of 25 years applies.

For vessels in excess of 100,000 dwt a 20 years’ limitation applies. This rule is excluding a large part of the old Suezmax fleet, but is leaving in older Aframaxes. The rule, however, also applies to vessels loading or discharging at BP Amoco terminals, irrespective of the charterer involved.

KPC is firming up their requirement for a maximum vessel age of 20 years for loading in Kuwait, irrespective of CAP class or not. Bassøe questions, however, whether age alone is a relevant measure of quality. They say that early 90s built tonnage is approaching 10 years of age, and is in many instances built according to an inferior specification compared to 70s built units, but oil company scrutiny of older tankers will increase further. From a trading point of view size, speed and consumption is becoming more important than ever.

It will be increasingly difficult to find employment for old VLCCs irrespective of prevailing rate levels. Bassøe, therefore, foresee continued high demolition activity this year.

Looking at the balance between new deliveries this year and the age profile, the following figures spring to mind. There are 38 scheduled VLCC deliveries and the number of vessels 25 years or above will reach 74 within this year.

Assuming an average scrapping age of 25 years, it is evident that the VLCC market is not over-contracted, especially in the medium term. Even if demolition does not reach this level, Bassøe believe it will continue at a level sufficient to improve the market balance in favour of the owners.

As rates increase, owners’ propensity to hold on to their vessels will increase as well. Bassøe does not doubt that a strong improvement in rate levels will induce oil companies to change their policy with regard to HBL acceptance. But the bottom line is that the decision to scrap old VLCCs is likely to become less dependent on prevailing charter rates, as outside pressure to enforce stricter age restrictions increases.

Taking into account an expected increase in VLCC demand, on the back of increased US and Asian oil consumption, as well as a gradual relaxation of OPEC quotas, Bassøe concludes that this month’s positive rate adjustment is a pre-warning of a gradual market strengthening throughout this year.

Source: P.F. Bassøe Shipbrokers