Improved freight rates and low scrap value place tanker demolition in the backburner
Many anticipated a spike in tanker demolition rates due to declined freight movements. Hence, owners of bulkers and containers are hesitant to release their vessels to enjoy the increased freight rates. Scrapyards have offered a 10 per cent increase and shipbrokers are expecting the hike to escalate.
Intermodal’s latest weekly report remarked, “The shipping market players are familiar with the inverse correlation between the freight market and demolition activity. That means when the market picks up, we usually observe demolition activity declining and vice versa, while the level of scrapping will add new market equilibrium.”
George Kallianotis, a representative from Intermodal’s valuations department added, “In order for demolition activity to be impacted in either direction, market expectations for the medium term have to be aligned with actual freight market conditions. Therefore demolition activity reacts with some time lag to the current freight market environment. The decision to sell a vessel for scrap is driven by market cycle and expectations, and also tactically offered scrap prices versus that fetched at the 2nd hand market.”
Kallianotis added that owners of vintage tonnage are trying to exploit the current sound performance across all dry bulk and container segments – preferring to keep their vessels for further trading rather than scrapping. Despite positive market conditions in these two segments, possible demolition candidates could be those old units due for surveys. Neither owners nor parties looking to renew their fleet are inclined to incur these costs. However, scrap prices can be increased to make the demolition decision enticing. Scrap prices rose more than 10 per cent since the beginning of 2021; more than 29 per cent compared to 2020.
Tanker scrapping outlook
An Intermodal’s analyst said, “So far during Q1 2021, the freight market and expectations in the dry bulk and container segment have been extremely optimistic. The wet market has yet to recover from the severe downturn experienced as a result of oil supply cuts and soft demand amid the ongoing COVID-19 pandemic. YTD dry bulk scrapping rate in dwt terms is estimated -21 per cent below the same period last year, while tankers scrapping is estimated +91.1 per cent y-o-y. However, taking a closer look at the tankers sold for scrap, we would expect the current market conditions (with VLCC rates suppressed since the beginning of 2021 and recently turning negative) to favour the larger crude carriers towards scrap yards. About 11 vessels were scrapped this year with half of them being handysize or medium range tankers, while the rest consist mainly of Aframax, two shuttle tankers and no VLCCs.”
Kallianotis contended: “Owners of the larger crude tankers may have enough buffer from 2020’s stellar earnings amidst floating storage economics skyrocketing and able to withstand adverse market conditions. They have to expect that the market will turn a corner should OPEC+ reverses oil supply cuts in the next months. We could also argue that owners prefer to sell their vessels in the second-hand market, as the premium they are currently getting over selling them for scrap is quite substantial. While scrap prices are expected to rise further during the second half of 2021 amidst increased demand for scrap restocking, it remains to be seen how all of these factors will impact demolition activities across the different shipping segments, with expectations for that of tankers scrapping activity increasing.”
Hellenic Shipping News