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Shipping industry to scrap the most oil tankers in more than five years: Tough operating conditions expected to persist until second half of next year, analysts say

Shipping industry to scrap the most oil tankers in more than five years: Tough operating conditions expected to persist until second half of next year, analysts say
Reuters June 4, 2018

The shipping industry will this year scrap the largest number of oil tankers in more than five years in a move driven by weak earnings, firm prices for scrap steel and the need to prepare fleets for strict new environmental regulations.

The surge in scrapping underscores how the sector is grappling with one of its worst crises, hit hard after rates for transporting oil plunged to their lowest in several years - largely due to excess tanker supply and tepid demand as members of the Opec's production cuts bite.

“The tanker markets are definitely in a trough at the moment, with one of the worst years in a decade in terms of freight rates and returns,” said Ralph Leszczynski, head of research at shipbroker Banchero Costa in Singapore.

The tough operating conditions are expected to persist until at least the second half of next year, analysts and industry sources said.

Estimates on the number of tanker demolitions vary between the four shipping analysts that Reuters spoke to, with the most conservative standing at a seven-year high this year.

About 10.3 million deadweight tonnes (DWT) have been sold for demolition from January to April 2018, compared with 11.2m DWT for the whole of 2017 and 2.5m for 2016, said Erik Broekhuizen, head of tanker research and consulting at ship broker Poten & Partners.

“Opec production cuts are hurting the market, and as long as they are in place the tanker market will remain challenged,” he said, adding that larger vessels were being particularly targeted.

Since early last year, Opec members, Russia and other non-Opec crude producers have curbed exports to fight a global oil glut.

The imposition of new US sanctions against Iran appears set to further reduce oil flows this year, although Saudi Arabia and Russia have discussed potentially raising output to fill any void.

More stringent environmental regulations to be implemented by the International Maritime Organisation in 2020 will make operating older ships uneconomical, said Mr Leszczynski at Banchero Costa.

Limited interest in using tankers to store oil, which has historically been a profitable option for shipowners during lulls in shipping volumes, is also curbing overall demand, analysts said.

Scrap steel prices in Shanghai, China – the world’s top consumer and producer of the material – have meanwhile nearly doubled from a year ago due to shutdowns of inefficient steel mills amid a widespread clampdown on industrial emissions.

Companies that have recently sent scrapped vessels include India’s Essar Shipping and Oslo-listed Frontline. The latter last month reported better earnings than analysts expected, partly due to its increased scrapping.

The ships being scrapped are also getting younger, with the average age falling to 19.5 years in the first quarter of this year, compared with 2017’s average of 22 years, said Rajesh Verma, an analyst with shipping consultancy Drewry.

Most of the vessels are being scrapped in Bangladesh and India, although Pakistan has also returned to the demolition market after an 18-month ban, analysts said.

The increase in scrapping rates has come despite increased opposition from European regulators due to environmental concerns.

Despite the high demolition rate, tanker earnings will continue to be hit as fleet-growth is still too high, analysts said.

Mr Leszczynski said he expected the crude tanker fleet to expand 3.3 per cent this year, following growth of 4.6 per cent last year and 5.8 per cent in 2016.

With tanker rates still a long way from being profitable, there’s little prospect of a broad industry improvement until the second half of next year at the earliest, said Peter Sand, chief shipping analyst at industry lobby group Bimco.

“Any recovery in rates in the tanker market will be hinged on the extent of scrapping in the coming years. We expect rates to start recovering in the second half of 2019 if scrapping remains strong,” said Mr Verma at Drewry.