Tanker scrapping at 2021 high in October

More tankers were scrapped in October than in any other month this year, despite tanker rates also reaching their highest of the year in recent weeks.

A total of 17 tankers were sent to the demolition yard last month, compared with 16 and 11 in September and August, respectively, according to data compiled by Argus. This brings the total number of scrapped tankers so far this year to 116, significantly higher than the 41 sent for demolition in the whole of 2020.

Tanker freight rates were under consistent pressure for most of this year, on the back of weak demand for crude and product shipments, which has incentivised scrapping.

In October, freight rates on some of the key tanker routes, such as the Mideast Gulf to Asia-Pacific very large crude carrier (VLCC) route, reached their highest in over a year. Asia-Pacific crude demand picked up as Covid-19 lockdowns eased, the Chinese government issued new import quotas, refining margins widened, and higher spot natural gas and LNG prices prompted gas-to-oil switching. But higher bunker prices also played their part in lifting rates in the market, dampening the impact on shipowners' earnings.

Long-term indicators suggest that a sustained tanker recovery remains some way off. Global VLCC tonne-mile demand — a key indicator of market strength — lags well behind pre-Covid levels, according to Vortexa, and despite levels of average daily laden VLCCs being comparable with those before the pandemic, the global fleet has grown since 2019 when the market was already considered to be under supply pressure.

Additionally, rising demand for newbuild tankers this year has increased the global orderbook, which could delay a rebound in rates when these vessels enter the market from 2023, according to research firm VesselsValue and shipping analyst ViaMar. The current tanker fleet is likely to be "more than sufficient" to meet the increase in cargoes in the market arising from the Opec+ group's easing of production constraints by 400,000 b/d. This could mean short-term limitations on any rate rises through to 2022, "especially if Opec does not raise production above its stated plan", the report said.

Despite short-term increases in freight rates, the tanker market will probably continue to remain under pressure for some time, which could incentivise further scrapping of older tonnage.

By Saleem Rizvi