Tanker demolition could pick up on market-based conditions, rather than legislation

The tanker market isn’t in its best during this year, with rates subdued and oversupply concerns being the main hindering factor to a rebound. As such, many market analysts expected that a higher demolition rate could be the solution and this development could be triggered by new legislation measures, most notably the Ballast Water Management Convention. In its latest weekly report, shipbroker Gibson said that “last September one of our reports focused on the prospects for higher demolition activity for tankers on the back of impending environmental regulation which at that time provided the market with some optimism. The main case for our optimism was the introduction of the Ballast Water Management Convention due to enter into force this September. However, owners were successful in lobbying Flag States to provide a loophole mitigating their exposure to an unpopular act. Analysts were forced to revise the impact of this piece of legislation”.

The shipbroker added that “last month, under pressure, the IMO announced a further two year delay to implementation, which provided some owners with an additional reprieve. The second item of legislation was the introduction of the Global Sulphur limits to be implemented from 1st January 2020. This legislation now appears to be ‘set in stone’ despite the ongoing arguments on the availability of compliant fuels, and at what cost and the use of abatement technology etc. Last September most analysts believed that owners faced with all the associated costs of complying with legislation would opt to scrap older tonnage”.

Gibson added that “as August commenced, it was clear that most sectors of the tanker market were entering the usual summer doldrums and that pressure on rates would provide owners with a severe headache as they left on their summer vacations. The influx of newbuilds over the first half of the year adds more pressure and the wave of low priced orders only raise concerns further down the line. But, perhaps the tanker sector may be on the cusp of a wave of demolition forced by market conditions rather than the impact of legislation? Over the last 30 months, poor trading conditions and a heavy influx of newbuilds in other shipping sectors saw over 850 bulk carriers consigned to the acetylene torches and over 270 container ships doomed to a similar fate. Over the same period, less than 100 tankers (25.000 dwt+) have been sold for recycling. Could the tanker market be entering a similar period where firm rates will be a challenge and the slump prolonged?”

According to the London-based shipbroker, “as well as the present malaise covering much of the tanker market, several indicators are flagging up the potential for an upturn in tanker scrapping. First of all, we have already exceeded last year’s total by more than 1 million tonnes deadweight. Perhaps not too hard to beat given last year’s all time low total, but significantly 1.8 million deadweight has been committed since June, perhaps another indicator that tanker scrapping may be taking off? Sales to Indian and Bangladeshi breakers have accelerated despite the monsoon season which usually means much slower activity. Also scrap prices on the sub-continent are around $100/tonne higher than this time last year which might add incentive and we are beginning to see 15 year old second-hand prices converge with rising lightweight prices. Another pressure is that storage employment opportunities for VLCCs are also diminishing”, it concluded.

Additionally, “it is also apparent that more tankers are being circulated amongst brokers as potential demolition sales. Several owners with fleet renewal programmes may be anxious to scrap rather than place tonnage for sale to competitors. Cash generated by sales could also be welcome by owners to see them through the current lull in the market. Owners presently on holiday may be spending more time looking at spreadsheets rather than relaxing pool side”, Gibson concluded.