As anyone in shipping knows, the present anemic freight markets can generally be attributed to tonnage oversupply; unlike previous downcycles when generally world trade had collapsed, in the present downcycle, despite the overall worldwide malaise, world trade has been growing – albeit, it does not seem to grow fast enough to absorb all the new deliveries of vessels, vessels that were ordered when credit was as cheap, easy and loose as lifelong ‘commitments’ during some exotic port calls in the Captain’s career.
Since vessels on order seem to keep getting delivered, with some ‘slippage’ or despite a few cancellations, a lot of hope has been placed that an accelerated demolition schedule will bring salvation in helping balance the market. Tonnage demand and trading patterns are what they are and cannot change fundamentally on short notice; cancelling newbuildings is much more complicated than one would expect, and generally, as multi-partite agreements, more burdensomely negotiated than the unilateral decision of a shipowner to sell a vessel for scrap.
In 2011, despite the fact that tanker freight rates had been worse than in 2010 and beastly ugly overall, only 170 tankers (about 10.5 million dwt) were scrapped versus 280 tankers (14.75 million deadweight) in 2010. Thus, overall scrapping activity has not been as high as one might expect, or to a degree of compensating for the newbuilding deliveries.
However, a lot of analysis and interpretation has gone into the recent sale by MOL of three mid-nineties built double hull VLCCs for demolition. Another similar vintage VLCC from NYK was withdrawn from the market by way of ‘cold layup’. Thus, excitement has been building up that the time has come for even good, double hull vessels to exit the market and thus bring soon a tonnage equilibrium.
As much hope as such an omen purports to, probably it is still premature to call for the massive demolition of vessels of about fifteen years old, just because of the above examples. In the Captain’s opinion, it will take a much more sustained weak freight market, several many more months of below operating breakeven freight rates, before a larger number of shipowners start considering such an option.
Vessels are usually engineered with an approximate design life of twenty-five years. It seems that freight rates have the greatest impact than any other factor in determining when vessels are getting scrapped; until a few years ago, tankers were scrapped at an average age of 26-27 years and dry bulk vessels closer to thirty years, when freight rates were going through the roof. However, to expect that suddenly the average age for scrapping will drop between 15-20 years, just because of the examples above, is an ambitious goal, at least for now. As painful as a weak freight market can be, it’s even more painful for an owner to sell the vessel for scrap; once the vessel is sold for scrap, the opportunity cost is that any improvement in the freight markets will be a thankless turn in fortunes.
Taking a closer look at these tanker demolitions, MOL sold the vessels for scrap primarily because they are a huge conglomerate, unlike most shipowners, with a long term view of the markets, and could afford to make such a decision. Further to it, based on the Captain’s direct understanding, MOL opted to sell the vessels at a lower price for scrapping than to sell them at a small premium above scrap in the second hand market where would have ended trading in the market and competing with the remaining MOL tonnage. One has to admire and respect an owner like MOL where they decided to forego additional cash in exchange for contributing to a more balanced market. Once again, only big owners and conglomerates with long view of the market have taken such action that helps the market. It will be difficult seeing many independent owners acting as altruistically for now, unless freight rates decline even further and remain depressed for several more months.
There were a few more relatively young tankers that were scrapped in 2011 (before their fourth special survey - twenty years of age), but the great majority of them were vessels owned by financial owners, or publicly traded companies who had outsourced the technical management and maintenance of their vessels to third parties, and such vessels were uncompetitively expensive to be dry-docked (due to poor prior maintenance).
Thus, the news for the sale for accelerated demolition of newer tanker vessels might have been exaggerated, since either big conglomerate shipowners or financial (and quasi-financial) owners so far have been opting of selling such newer vessels for scrap. As hopeful and ‘altruistic’ as that the demolition of newer tonnage sounds, likely it still will take a prolonged weak freight market before independent shipowners start taking collective action.
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