One of the main contributors to the low tanker rates experienced during 2017 has been high fleet growth, particularly in the large crude tanker sectors, says a report from Teekay.
This is partly due to a heavy delivery schedule as a result of orders placed in 2015, but it also due to very low levels of tanker scrapping. However, it appears as though the tide my be turning.
Tanker scrapping was virtually non-existent in 2015 and 2016 with around 2.5 mdwt of tankers scrapped in each year. To put this into context, these were the lowest years of scrapping since 1989, when the tanker fleet was less than half the size it is today.
This low level of scrapping was partly due to the stronger rate environment during those years, but was also a reflection of the very young fleet age profile that had emerged after some very heavy scrapping years in 2009-14. Put simply, there just weren’t many scrap candidates, and in a firm rate environment this led to very low scrapping levels.
Fast forward to 2017, and the environment now is much different. For a start, freight rates are at their lowest point since the 2011-13 downturn, and there is much uncertainty with regards to the outlook for 2018.
Secondly, the fleet is starting to age again, with the average age of the tanker fleet breaching 10 years for the first time since 2007. Thirdly, upcoming regulations on ballast water and low sulphur fuel could encourage owners to scrap rather than pay for costly upgrades on top of normal dry docking costs.
And finally, scrap prices are relatively attractive at over $400 / ldt. As a result of the above, tanker scrapping has started to rise again with 2.5 mdwt scrapped in August – the most in a calendar month since March 2000.
If this pace of scrapping continues it will help to offset the impact of new vessel deliveries and will put the market in a much healthier position as we move into 2018 and beyond, says Teekay.