Companies around the world have scrapped a record number of large crude tankers in 2018.
About 100 vessels of the industry’s main crude carriers have been sent to India and Bangladesh for demolition, according to data from Clarkson Research Services Ltd., the statistical and research service arm of the world’s largest shipbroker.
Bloomberg said the shipping bust is no surprise, as of September the vessels, which transport 40% of the world's crude, were on course for the worst charter rates in three decades.
In an August report, Bloomberg specified the implosion of charter rates was due to a two-year reduction of OPEC cargoes and environmental regulations. As we have said before, the global growth slowdown has certainly not helped.
Morgan Stanley estimates the global fleet of large crude carriers could lack 100 million barrels of transportation capacity in the first half of 2020.
“It prolongs the period of profitability after the turnaround,” said Fotis Giannakoulis, a New York-based shipping analyst at the bank.
“The more you scrap, the more you bring the recovery forward and accelerate its speed. The market will strengthen with high scrapping even with smallest growth in demand.”
In other words, today's scrapping of vessels is seen as a deleveraging period to clear excess and rebalance the industry.
Average earnings for 2 million barrel-hauling VLCCs crashed by 65% to $6,159 a day in 2018, the lowest since the financial crash according to data from Clarkson. They were $17,794 for all of last year, $41,488 for 2016 and $64,846 in 2015.
For companies who did not scrap, rates recently moved higher more threefold from late September to mid-December, according to Clarkson figures.
"What those demoralized owners perhaps failed to foresee was a sudden surge in cargoes. With the U.S. poised to impose sanctions on Iran earlier this year, producers including Saudi Arabia and Russia began adding barrels to the market.
Between May and November, the world’s largest and second-largest exporters lifted their combined output by about 1.5 million barrels a day. American shipments are also soaring. As well as adding demand for vessels, the increased oil supply also drove down fuel prices -- the industry’s single biggest expense.
Up in the North Sea, ships that move 600,000-barrel cargoes earlier this week were earning $72,664 a day, the highest in 3 1/2 years, according to data from the Baltic Exchange in London. At the start of December, giant 2 million-barrel carrying vessels were making $58,000 from delivering Middle East oil to China, the most since at least the start of 2017. West African rates also surged," said Bloomberg.
Regarding transportation capacity, this year has been the most substantial scrapping period of crude vessels since 1985. The end of year surge in charter rates does not mean owners were wrong to demolish; it is quite normal to clear the excess vessels to rebalance the industry.