-Covid-19 destroys the market for supertankers that deliver about a fifth of the world’s crude oil.
-This is to boom trade on the beaches of Bangladesh, India and Pakistan, where obsolete ships go to get blow-torched and sold for scrap.
-The 1,200-foot vessels plying the industry’s busiest trade route effectively had to subsidize the delivery of cargoes because of how large the surplus of ships has grown.

A recent news article published in the Bloomberg reveals the gloomy market for supertankers.

•Vessel glut

The vessel glut has really been in place since when Covid-19 caused oil demand to collapse early last year.

It has until recently been masked by a huge chunk of the fleet storing crude that was previously surplus to requirements.

Saudi Arabia and other major producers are keeping millions of barrels off the market.

Also with stronger consumption, those stored cargoes are being snapped up again — leaving the tankers unemployed.

•Tanker owners’ plight

“It is hard to imagine a set of circumstances that is more against tanker owners than the ones at the moment,” said Brian Gallagher, head of investor relations at Euronav NV, owner of the world’s third-largest fleet of supertankers. “When you have scrap prices at these levels that’s very attractive, it changes the dynamic for owners of older tonnage.”

•More vessels to scrapyards

That will see more of the vessels sent to the world’s scrapyards, according to multiple conversations with tanker-company executives, many of whom didn’t want to discuss publicly how challenging the market has become.

Clarkson Research Services Ltd., a unit of the world’s largest shipbroker, expects about 2% of the fleet to get demolished in 2021, up from almost none for the past two years.

Its forecast was made before the slump into negative rates.

The scrapping may not be enough to save the market in the coming months.

The amount of oil being shipped at sea remains far below normal levels as OPEC.

And its allies continue to withhold huge volumes of production and vessels that were used as storage during the oil market’s mammoth 2020 glut are now coming back onto the market and looking for business.

•Scrapping a tactic

More importantly, scrapping is typically seen as a tactic that stops the rot. It doesn’t usually drive a surge in rates.

On Wednesday, daily earnings for supertankers sailing on the benchmark Middle East to China route were -$1,190, according to figures from the Baltic Exchange in London.

•Fixed cost for a vessel

The Baltic’s numbers assume fixed costs for a vessel, which can be mitigated.

For example fuel costs can vary and ships are able to slow down to limit their consumption.

Several of the tanker owners said they were doing this when sailing back to the Middle East for cargoes.

•Current earnings malaise

The current earnings malaise will force ships that are more than 15 years old to consider heading for the break-up yards of Asia, the executives said.

Every five years a vessel has to undergo a special survey that costs millions of dollars, money that’s hard to find when vessels are making a loss.

•VLCC scrap value

The scrap value of a VLCC currently stands at $18.95 million, according to the most recent Clarkson Research data. That’s the highest since March 2018 and could offer a further incentive to scrap.

Even so, most owners don’t expect a recovery in earnings until the second half of the year, when expectations are that oil demand will start to snap back toward pre-coronavirus levels.

That should result in more volumes of crude sailing across the world’s oceans.

Source: Bloomberg