The vintage converted VLOC’s still make economic sense

With an average age of 23.8 years, the fleet of Very Large Ore Carriers (VLOC) converted from Very Large Crude Carriers (VLCC) are vintage compared to similar ships. The average age for a non- converted ore carrier above 200,000 DWT is 5.7 years. Thereby, there is a huge age gap of 18.1 years between converted VLOC’s and normal VLOC’s.

Still, the age itself is not the all-important explanatory factor behind a demolition decision. Naturally safety is a paramount issue, but also the fact that they are still employed on a contract.

BIMCO’s Chief Shipping Analyst Peter Sand comments:” There are few acute purely economic incentives to demolish VLOC’s converted from VLCC’s despite the comparable high age. Some of the reasons being: still running on time charter contracts and identical prices for demolition and secondhand sale.

Most of the converted VLOC’s are operating profitable on fixed routes and schedules, as they have secured freight rates and employment on long-term time charter contracts long time ago. This allows them to deliver a positive return on investment where others may fail, despite not being of the most modern ship design around.

As the value of a converted VLOC currently in service, is the same in the secondhand market as the demolition market, there is neither an incentive for selling your ship for immediate profits”.

19 of the converted 51 VLOC’s are past average demolition age

The average demolition age for the VLOC’s converted from VLCC’s is 24.2 years and with an average age of 23.8 years, many converted VLOC’s are past the demolition age or close to. Currently the converted VLOC fleet capacity consists of 36% ships older than 24.2 years, which amounts to 5.1 Mio. DWT. Furthermore, 34% or 4.7 Mio. DWT will exceed the average demolition age within the next 12 months.

BIMCO’s Deputy Secretary General Lars Robert Pedersen adds:” The lifespan of a ship depends on a variety of parameters, such as maintenance, general fatigue and the design itself.

Without specific knowledge about these parameters it is impossible to draw specific conclusions on the general lifespan or projected life of any ship type”.

Secondhand price and demolition value have merged

Six years ago, the secondhand price for a converted VLOC was 30% higher than the demolition value. However, as the earnings for the average capesize ship during large parts of the period between July 2012 to January 2013 plunged below the general OPEX-level of $7,500 per day, the secondhand price fell to a level near demolition value.

Until January 2015 the secondhand price was slightly above the demolition value. As the earnings started to slide in 2015 and continued into 2016, the secondhand price and demolition value merged and have stayed at the same level ever since.

In 2016, 4 converted VLOC’s were demolished and so far, 1 converted VLOC has been demolished in 2017.

The converted VLOC fleet could carry 26% of the Brazil – China iron ore trade

24% of the total VLOC fleet is converted from VLCC’s, as 51 converted VLOC ships are currently in service, amounting to a total of 14 Mio. DWT compared to a total of 214 Capesize ships above 200,000 DWT classified as ore carriers.

Peter Sand adds:” The average size of a converted VLOC is 275,000 DWT. Therefore, if all 51 converted VLOC’s were fixed on the route from Tubarao, Brazil to Baoshan, China, they would be able to carry an estimated 1.1 Mio. tonnes of iron ore each, per annum. Thereby, the current batch of converted VLOCs can carry 56 Mio. tonnes of iron ore, if operating on the Brazil to China route. This is equals to 26% of the total iron ore trade from Brazil to China in 2016

In comparison, the existing newbuilding orders for 32 valemax ships (400,000 DWT each), amounts to 12.8 Mio. DWT. This capacity will enter the dry bulk shipping fleet and will be deployed on the Brazil to China route, where they will be able to carry 51.2 Mio. Tonnes of iron ore, per annum on multi-year time charters.

We highlight this to make the point that the 32 valemax ships, are being built and scheduled for delivery in 2018-2019. At that time, many of the converted VLOCs may still be actively trading. Thus, we do not expect the delivery of the valemax ships into the active fleet to be neutralized by immediate or simultaneous demolition of the converted VLOC fleet”.