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No. 2 Safety Valve
10 years ago, at the beginning of 1998, the world VLCC fleet counted 434 vessels. 63 were of DH construction, and about 172 TTīs, mostly built in the 1970s, were still trading. Over a period of about 5 years virtually all of the oldies were removed. Combined with deliveries of new tonnage during the period, the fleet actually shrunk 424 vessels during the period.
Do we have a similar situation today?
To answer this question ourselves, we would say: No, not exactly - but there are similarities.
From the middle of the 1990s VLCC earnings gradually improved, but in general they were far from being sufficient taking the magnitude of investments and risk into consideration. With the onset of the Asian financial crisis we saw the first wave of tanker removals and with the "dotcom" crisis a few years later we saw the second wave - the two periods were divided by a mini-boom in 2000. At the time, owners were blessed with a large, ageing and fuel-inefficient fleet that was readily available to be "axed". Especially in 2001/02 when oil prices, and subsequently, bunkers prices rose, the TTīs were steadily the last choice of charterers combined with an increasing availability of DH tankers. Increased waiting time made these relics from the 1970īs commercially obsolete. Coinciding in time, an increased demand for FPSOīs resulted in several of the vessels being permanently converted to such offshore units.
The final tally of VLCC fleet changes during the five-year period (1998-2002) shows that 150 newbuildings were delivered and 160 vessels were removed. Out of the 160 vessels, 142, or 83% of the TT fleet, were removed. The remaining 30 TTīs were removed by 2006. The TTīs proved to be the "safety valve" in the VLCC tanker market and was used to balance the fleet in difficult periods.
The market situation today is quite different, but still there are similarities. We do not have an old and technically obsolete fleet, but we have the SH tankers and the IMO phase out schedule. At the same time we have a dry bulk market that is undergoing structural changes increasing demand for Very Large Ore Carriers (VLOC). As Chinaīs appetite for iron ore steadily increases, we see more and more shuttle trade between Brazil and China. Opportunities for backhaul trades are limited and as a result larger vessels are in demand. Hence, we see a substantial number of VLCCs, that otherwise would be phased out by end 2010, being converted into VLOCs. So far we have seen 24 VLCCs arrive conversion yards and another dozen, or so, are expected to be converted. All these vessels are SH VLCCs that phase extinction by the end of 2010.
In addition to the 24 VLCCs currently undergoing conversion there are about 112 SH VLCCs still trading. Their trading environment is becoming increasingly difficult. After the "Hebei Spirit" accident in December last year we observe that it has become more difficult to operate SH tankers. This is evidenced, amongst others, in the freight discount SH VLCCs have to offer in order to be employed. In 2007 this discount was about 12 WS points (MEG-East) whereas the spread has increased to 25 WS points during the first 6m of 2008. In terms of freight the discount has increased from about 1.9 $/mt last year to about 4.1 $/mt this year. Obviously, charterers prefer DH vessels and resort to SH only when they have to.
In the coming 30 months about 152 VLCCs are scheduled for delivery. This represents about 31% of the existing fleet. On the other hand, the remaining SH fleet represents about 23% of the fleet. Hence, net VLCC fleet growth could potentially be reduced to about 8% over the period. Annualized the fleet growth is reduced from 11.4% in worst case to about 3.2% in best case. The former alternative will be a disaster for VLCC owners, but the latter will, in our view, maintain high, albeit volatile, freight during the coming two and a half years.
There is definitely a safety valve in the market place today.
