With demolition values on the rise and impending environmental regulations that will require costly upgrades to existing vessels, the very large crude carrier (VLCC) sector is set to see an accelerated scrapping program begin this year.
The scrapping spree is expected to persist throughout the next five years, according to a five-year forecast period from McQuilling Services brokerage and consultancy.
In 2017 ten VLCCs are set to exit the trading fleet, followed by 23 in 2018 and an average of 34 ships per year in the outer years of the forecast cycle.
"Should an increase in tanker exits transpire, it would help to offset some of the fleet growth in recent years, especially as fewer vessels are anticipated to deliver from 2018-2021, despite a rather strong start to VLCC contracting this year," McQuilling informed.
The pace of scrapping has remained muted over the past few years, despite mounting financial pressures being faced by VLCC owners in the spot market.
In the first quarter of the year, the freight rates on the major VLCC benchmark trades were stuck in a downward spiral with limited upward swings. The weakness in rates can be attributed to a multitude of factors, the most influential being vessel supply.
Over the last five years, the VLCC fleet has experienced "a tremendous growth spurt," expanding by 117 vessels through the end of 2016. Another 17 ships have hit the water in the first quarter, while just two have exited the trading fleet – the DHT Ann for conversion and the Varada Blessing for demolition.
"An increase in the number of newbuilding deliveries hasn’t been the only factor that has led to an oversupply issue this year. Port delays and floating storage, which act as temporary supply reduction factors, have not been as prominent in 2017 as they were last year,” according to McQuilling.
VLCC newbuilding orders placed thus far in 2017 have caused some market participants to become weary about the future of this tanker segment. At the end of the first quarter, McQuilling captured 14 VLCC newbuilding orders placed by TMS Tankers, NS Lemos, DHT Holdings, Kyoei Tanker and the Angelicoussis group. Adding to this are the three orders reported by Shandong Landbridge and one option one by Neda Maritime in April, bringing the total to 18 orders, the highest level seen since 2014.
Hyundai Merchant Marine has also signed a letter of intent with Daewoo Shipbuilding and Marine Engineering (DSME) for up to 10 VLCCs. Meanwhile, Sentek Marine recently emerged as having ordered up to four VLCCs from Hyundai Samho Heavy Industries.
McQuilling said that the weakness in rates "will persist in the second quarter of the year," while oversupply will continue to be a concern for this tanker segment in the second quarter of 2017 and the remainder of the year as another 25-30 ships are expected to join the trading fleet before 2018.