Phase out of tanker tonnage – does it really matter to the market?

Phase out of tanker tonnage – does it really matter to the market?

Overview

Whether the phase out of single hull and non-double hulled tankers becomes massive in 2010 or at the latest stage in 2015 does not really matter to the market.

Whether the phase out of single hull and non-double hulled tankers becomes massive in 2010 or at the latest stage in 2015 does not really matter to the market. The amount of tonnage to be phased out does not even exceed the new tonnage coming on stream in 2010. At the very best, the net tanker tonnage supply in 2010 will be offset if the earliest scenario for phase out is followed. Then the scheduled delivery of 52m DWT will be offset by the phase out of 42m DWT, if room is left for some slippage in the order book and additional demolition.

Market balance:

But 2010 cannot be seen as an isolated year. The large inflow of tonnage in 2009, which grow tonnage supply by 45m DWT, almost 8%, is outstripped by the sluggish demand. This will lead to an oversupplied market when entering into 2010. The projected supply growth in 2009 is set to be 8% and, with a contraction in demand, the fundamental supply-demand balance in the market will be negative. This leaves an overhang of tonnage going into 2010. If we for a second assume the phase outs will take place in the early scenario, 2010 could be balanced if it was not for the overhang, but the challenges lie ahead with 47m DWT more to come on stream in 2011 and 22m DWT in 2012+

NOTE: The supply outlook for 2009-2013 is estimated under the assumption that the scheduled deliveries fall short by 10% owed to vessels not being built, due to cancellations, finance issues, failing yard establishment e.g. and 25% of scheduled deliveries to be delayed or postponed. Scrapping of all vessels aged 30 or above before the end of 2013 is assumed.

What options does a single hull tanker owner have?

  1. Continue to trade the vessel until the end of 2010 and then scrap it.
  2. Seek exemptions from 2010 phase out and spend the money needed for fulfilling the Condition Assessment Scheme (CAS) requirements. The cost of this could be several million USD, depending on how good the state of the vessel is.
  3. To convert the single hull (S/H) tanker into a Very Large Ore Carrier (VLOC) is another option to consider. This was a hot issue back in 2007 and 2008, when dry bulk rates were high. And since the dry bulk market still surprises most observers on the upside a conversion may still be an attractive option for some owners. Although trading and operation of the converted vessels have caused some big challenges for owners and employment has been hard to find. Last but not least, this option is also quite expensive, with estimates between USD 5-10 million for a conversion.
  4. The option of scrapping the vessel is always a possibility, if you believe the earnings potential for the vessel is evaporating. In current markets an S/H VLCC can make USD 350/ldt, giving a sales price of USD 11 mill.
  5. Selling the vessel to another owner who has a different view on the market is another option. The current market price for an S/H VLCC is USD 18-20 mill for a vessel aged 16-20 years. This is a relatively high price that could indicate that the vessel will not be phased out at the end of 2010. Otherwise, the price would have been much lower – since VLCC spot earnings today and forecasts for 2010 and 2011 are not exactly bullish.

The average spot earnings for a modern VLCC in 2009 have been USD 30,000 per day. The forecast for the next six months is USD 20,000 per day, and should that level continue throughout 2010 as present forward rates predict, the owner would then make an estimated profit of USD 3.6 million until the end of 2010. This implicates two things: either the current second hand price is too high or the new owner plans on continued operations of the VLCC into 2011 and 2012 in order to breakeven on his investment.

Assuming VLCC operating costs of USD 12,000 day and equal rates for single hull and double hull VLCC which is the case in current markets – an unleveraged S/H VLCC must make USD 40,000 per day in the last nine months of 2010 to break even on the investment before the end of 2010. Earnings like that for a vessel like that is hard to imagine will come true in the light of present market conditions.

Phase out scenarios:

There are two ways to approach the much anticipated out-phasing of single hulled and non-doubled hulled vessels.

The early scenario is represented with figures from Clarksons. It assumes 61m DWT to be removed according to the IMO regulation. If this is to become reality we will have to see 10m DWT removed in 2009 on top of the tanker demolition/removal we have already seen amounting only to 12m DWT at 1 October. In 2010 a massive 41m DWT should be removed in the early scenario leaving just 10m DWT to be phased out in 2011-2015. Whether the scrap yard capacity is ready to receive such an amount of tonnage is addressed below.

The alternative scenario is where the vessels in question are removed at the latest possible stage. It is assumed that tankers are granted life extension from the flag state to continue its operations beyond 2010, subject to satisfactory results from the CAS (Condition Assessment Scheme). Trading will then continue until the anniversary of the date of delivery of the ship in 2015 or the date on which the ship reaches 25 years of age after the date of its delivery, whichever is earlier.

The difference between the two scenarios is stunning. It is almost a mirror of one another. The reality may very well become something in between, but it clearly highlights that the phase out of tanker tonnage has the potential to impact the tanker market somewhat differently from what has been the consensus of the tanker industry since the IMO regulation was adopted.

Demolition and removal of tonnage

Despite all the talk about phase out of S/H tankers, not much has actually taken place. Actually, in recent years the greater part of tonnage leaving the tanker markets has been due to conversions (main part of “removals”) into VLOC’s which accounts for 12m DWT in 2008 and 2009. As visible from the tanker supply outlook the demolition due to sheer age is not about to make any difference in the next three years.

The bottom line is that not much is happening on the demolition/removal side yet, and even though 2009 is set to be the highest since 2003, this is not quite enough to matter to the market.

Other matters to consider

There are only a limited number of trades for a single hull tanker available today – and the number will go down as we close in on 2015. Today, single hull tankers are still trading into India, China, South Korea, West Africa, US Gulf LOOP, etc. But it remains that Port States have to accept the reception of S/H tankers and Flag States have to approve them subsequent to satisfactory results from CAS. Whether trading in the mentioned areas will be allowed beyond 2010 is still a bit uncertain.

The current freight rate conditions speak in favor of an early phase out. In current spot markets charterers are offered almost the same rate for a double hull and a single hull tanker. Given that choice, most charterers prefer the safe voyage for their cargo in a modern D/H tanker.

Will the capacity of the scrap yards be an obstacle?

This should not cause a problem. At the end of the day, the tanker which is heading for the breaker can just queue up in line. What matters is whether it is trading or not. Scrap yards have not been utilized fully during the recent boom and thus it is difficult to establish the maximum capacity of these yards. Furthermore, the IMO has urged governments in countries with ship recycling interest to take initiatives to maintain adequate ship recycling facilities at worldwide level and to promote research and development programmes to improve environment and safety level in ship recycling operation.

What does the regulation state?

Regulation 13G on prevention of accidental oil pollution of MARPOL annex 1 states that tankers which are single hull should be phased out or converted to a "double hull" by the dates set out in the revised regulation. The final date is 2015.

The regulation 13G allows the Flag State to permit continued operation of certain tankers beyond their phase-out date, in accordance with the schedule subject to satisfactory results from the Condition Assessment Scheme (CAS), but the continued operation must not go beyond the anniversary of the date of delivery of the ship in 2015 or the date on which the ship reaches 25 years of age after the date of its delivery, whichever is earlier. Under the regulation 13G, the CAS is applicable to all single-hull tankers aged 15 years, or older.

A Port State can deny entry of single hull tankers which have been allowed to continue operation under the exemptions mentioned above, into the ports or offshore terminals under its jurisdiction. E.g. EU has made it clear that only double-hulled tankers are allowed into EU-countries after 2010.

Conclusion

Whether the phase out of tankers becomes massive in 2010 or it will gradually matter more and more over the next five years does not really matter much to the market. The total amount of tonnage to be phased out does not even exceed the new tonnage coming on stream in 2010. At the very best the net tanker tonnage supply in 2010 will be offset if the earliest scenario for phase out is followed but supply growth will be back at double-digits in 2011.

in Copenhagen, DK

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