Fleet age profile, low rates, high scrap prices and regulations are all set to drive a four-year surge in scrapping volumes, says MSI Analyst Kieran Hess
The pickup in tanker scrapping seen in Q3 has set the scene for a resurgence in demolition volumes that looks set to be maintained beyond the end of the year.
At a forecast 5.9M DWT, 2017 is predicted to see much higher volumes of tanker scrapping than the 2.5M DWT recorded in 2016, according to MSI data.
While demolition volumes slowed in Q2 the situation is changing rapidly, with 4.6M DWT removed from the fleet in Q3 2017 alone. MSI expects a major increase in scrapping totals for 2018 through to 2021.
A number of factors provide the basis for the MSI forecast for higher scrapping levels. The first, and most important, is the fleet age profile.
Chart 3E, extracted from MSIís Q3 TSPS report, illustrates scrapping levels for vessels over the age of 15 years old and the proportion of vessels in the tanker fleet over the age of 20. Despite the increase in overall fleet size, MSI highlights the increase in the proportion of ships over the age of 20 years from 3.9% in 2012 to 6.3% in 2017.
This coincides with a reduction in scrapping from 11.9M DWT in 2012 to 3.1M DWT in 2015, with scrapping volumes remaining low into 2017, driving an increase in the proportion of the fleet over 20 years old.
Chart 3F shows the proportion of vessels over the age of 20 years for each market segment. All excluding the 10-70,000 DWT range show an upward trend between 2014 and 2021. VLCCs and Suezmaxes show the greatest increase in the proportion of vessels over 20 years old, with VLCCs rising from below 1% in 2012 to 6% in 2017. Suezmaxes over 20 years old double in the same period.
Although the 10-70,000 DWT sector shows a decline in ships over this age, the trend maintains an upward trajectory from 2015, and the overall proportion of vessels over 20 years old remains significantly higher than the other sectors at 8.9% in 2017.
Chart 3F also shows MSIís Q3 2017 Base Case (red line) and a zero scrap scenario (dashed red line) for the proportion of the total fleet over the age of 20 years.
The Base Case shows the MSI forecast proportion of vessels over 20 years old out to 2021. This increases to 9.9%, which includes its sizeable scrapping assumptions.
The zero scrap scenario gives a forecast for the same, but with no scrapping. It shows a 58% increase on the proportion of ships over 20 years old, at 15.5% of the fleet. Even with substantial scrapping expectations in 2018-21, the age of the fleet continues to increase and the MSI scrapping forecast may actually seem conservative.
Low freight rates and higher scrap prices are supporting the commercial case for increased demolition. LDT prices have increased overall during the year and in September, the 300,000 dwt La Paz was reported scrapped at a price of US$415 per LDT. Prices are now around US$115 per LDT greater than in September 2016. In addition, rates across the tanker sector have been subject to a downward trend since 2015.
Q3 has already shown positive signs in terms of capacity removals. Seven VLCCs were scrapped. Six Suezmax vessels were scrapped, three times as many as in Q1 and Q2 combined.
Fourteen Aframaxes and LR tankers were removed.
In 2018 MSI forecasts 15.8M DWT to be sent to the breakers. Through to 2021, as shown in Chart 3G, MSI expects high levels of scrapping activity, peaking in 2020 at 17.2M DWT.
This increase in demolitions will support a rebalancing of fundamentals in the tanker market, providing a constructive backdrop for future earnings increases.