Crude Tanker Owners Shunning Optimal Vessel Scrapping Market

When it comes to current market conditions, I’ve often described owners as reactionary and have very seldom been proven wrong. But in the crude tanker segment an interesting development is taking place which would appear to defy this reactionary behavior.

Therefore, I will admit to being a bit shocked that owners have not been taking advantage of recent astronomically high scrap prices for the many vintage vessels currently on the water, especially when they continue to command such dismal rates.

Source: VesselsValue Scrap Rates

These levels have only been seen once before this century and the collective apathetic response to these multi-year highs is quite contrary to what normally would be observed.

Source: VIE

Which leads to the obvious question of why aren’t more ships being retired?

After some consideration I came to the following conclusion.

In Trading & Investing in Shipping: Focus on the Supply Side, I note:

“As a vessel begins nearing the end of its service life, the current market and future projections can greatly influence the decision to retire early or perhaps extend operations. Rates are the deciding factor in this equation.”

This lack of demolition activity despite optimal conditions (high scrap prices and low spot rates) is perhaps being overlooked for what it really might be – the greatest possible insight into an owner’s thinking regarding the future of the segment.

Therefore, the only possible reason the market at large would be holding on to vintage vessels amid a major downturn and record high scrap prices is due to the collective notion that much better rates are ahead – good enough to justify sustaining losses over this short-run.

Make no mistake, now through 2022 will indeed be challenging.

A demand side recovery has been teasing the market like the ebb and flow of tides. While things have been improving, that sort of action is still expected as we forge ahead. This lackadaisical recovery will be tested in the form of higher-than-average deliveries over the course of 2022.

Source: Data Courtesy of VesselsValue – Chart by VIE

However, that burden will likely be brief as we move into 2023. This is due to the drastic drop in expected deliveries across all classes.

But more importantly, those 2022 deliveries which the market may find hard to stomach at first, will be easily absorbed at the onset of 2023 when supply is set to tighten due to the Efficiency Existing Ship Index, which is poised to hit the crude tanker segment the hardest. My thoughts on that in the next Capital Link submission.