Tanker Sector Can't Rely on Scrapping to Keep Market Balanced

Poten & Partners say there are not enough scrapping candidates to offset new vessel deliveries

In its latest Tanker Opinion, Poten & Partners Inc. (Poten & Partners) says that while tanker owners are currently "doing well" and will enjoy a strong market throughout 2016 as high crude production continues to require transportation, "after this year, we foresee weakening freight rates as deliveries increasingly affect tonnage supply and oil inventories start to wind down."

When that inevitable market decline comes, Poten & Partners argues that scrapping alone will not be enough to keep the market in balance.

While the global tanker orderbook is not excessively large in historical terms, the partners say it will still require a sizeable demand increase to maintain a balanced market in the coming years.

However, due to the 2004-2008 commodity boom, the fleet is fairly modern: of the current VLCC fleet of 653 vessels and 128 on order, 26 are about to turn 20 years old and could be scrapping candidates.

Scrapping candidates for the 594 crude tanker Aframax fleet (with an orderbook of 92 vessels) is 45 in number, and the 426-tanker Suezmax fleet (with 129 new vessels on order) has 21 scrapping candidates.

Even though many of these vessels will need to undergo a special survey within the next few years (which often compels owners, faced with spending millions of dollars in upgrades, to choose demolition as an option), Poten & Partners believe a relatively small number of vessels will be sent to the scrap yard.

"Based on the profile of the fleet, it does not look like there are enough scrapping candidates to offset the deliveries and quickly support the [weakening freight] rates," Poten & Partners concludes.

Last September, Poten & Partners predicted that tanker fleet expansion will "pick up a bit in 2016."