Crude Supertanker Rates Could Face Ongoing Capacity Threat

The bulls would claim that the very large crude carrier (VLCC) supply picture has finally brightened after years of gloom. They would say newbuilding deliveries were front-loaded into the first few months of this year, that the final capacity onslaught is over, and that a return to the good times for spot rates is just around the corner.

VLCCs, which each carry around two million barrels of crude oil, are the highest-profile subcategory of the crude tanker business and are colloquially known as ‘supertankers.' These vessels make up a significant portion of the fleets of public ship owners including Euronav EURN, DHT DHT and Frontline FRO.

The VLCC bears tell a very different story, however. Court Smith, senior analyst at VesselsValue, a U.K.-based shipping data and analytics company, is one of them.

"The orderbook is still cause for significant concern," he maintained in an interview with FreightWaves. "There are still a lot of VLCCs due to hit the water."

According to data provided by VesselsValue, 29 VLCCs have been delivered in 2019 year-to-date, but many more – 48 – remain to be delivered by year-end. Some of those deliveries will almost certainly slip to 2020, but that merely extends the problem. There are 39 VLCCs scheduled for delivery next year, excluding any VLCCs with deliveries delayed from 2019.

On a positive note for ship owners, looming fleet additions will be counterbalanced to some degree by the scrapping of older vessels.

Smith noted that there are a significant number of VLCCs in operation "that are at or equal to their scrap value, so they are worth just as much to the owners if they put them up on a beach for recycling." VesselsValue data currently shows 130 VLCCs built in 1991-2003 that are priced at scrap value, representing 17 percent of the total projected 2019 fleet of 763 VLCCs.

When those vessels are actually scrapped comes down to owner sentiment and, in part, to the timing of costly ‘special surveys' required by shipping regulations. A ship's third special survey occurs at 15 years of age; its fourth at 20 years. If rate sentiment is weak, a ship owner facing a multi-million-dollar special survey bill would opt to scrap the ship and walk away. Consequently, the fleet deletion pace can be partially estimated through data on special survey dates.

Smith explained, "Particularly as we approach 2020 [with the new fuel sulfur rules to come into effect], we should start to see a significant increase in bunker fuel prices in October or earlier.

"For older VLCCs, the fuel costs will be higher. If you take a ship built in 2000 and an identical ship built in 2010 – same engine, same design, same hull and everything else – the ship that is 10 years older will have worse speed and consumption [characteristics], because the ship is ‘out of true,' there will be more marine growth [on the hull], and for other reasons.

"In this higher bunker price environment, with the third and fourth special survey dates as the decision points, I think decisions will be pushed more towards the third special survey, " said Smith.

A surge of VLCC demolitions occurred in 2018; 31 were scrapped, according to VesselsValue. But it projects that only 13 will be removed this year (including three sales for demolition that have already been announced) and 14 next year.

Asked why VesselsValue believes deletions will decline versus 2018, Smith answered, "In 2018, everybody knew there were a large number of outstanding deliveries coming into the market, and I think people were even more pessimistic than they were actually saying they were. They ran the numbers and thought, ‘There's no way in hell I'm making $30,000 a day in 2019, so it's hard to justify making a substantial investment in a special survey, so I'll just scrap the ship.'"

He attributed the lower fleet deletion estimates for 2019-20 to "fewer ships approaching the special survey windows in the coming period than the previous one."

VesselsValue currently estimates that the VLCC fleet will increase to 823 vessels in 2020, up 8 percent from this year. If its analysis is correct and there is a confluence of fewer VLCCs scrapped and an ongoing market infusion of newbuilding deliveries in 2019-20, that does not bode well for rate-recovery hopes.

"Depending on how things go in the fall months, the early winter, and then into early 2020, I think it will be at least until the first half of 2020 [until there is a recovery]. But I'm not optimistic," warned Smith.

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