According to BRS Shipbrokers, the first half of the year is set to end with the lowest annualized tanker demolition level on record, with only 2 tankers scrapped so far into 2024 and multi-decade low deliveries expected throughout the year, the tanker fleet is set to age further this year.
A large wave of scrapping will be required over the next three to four years to contain the fleet’s upward trend in age growth and prepare the sector for compliance with global and regional maritime GHG emissions regulations, which are expected to tighten over the next five years. For the time being, the high earnings environment and gradual implementation of regional and global regulations absorbs the incremental compliance costs, BRS Shipbrokers noted, and also presented the following analysis:
Average crude and product tanker earnings at multi year highs – Demolition pace at record lows
Tanker demolition has followed the historical high correlation to earnings, and continues to defy the expected dislocation that fleet renewal requirements for environmental compliance will have to create…This has been taking place, partly due to the dark fleet that has removed a large part of the older fleet from mainstream trades.
What is the dark/shadow fleet?
The “dark fleet” or “shadow fleet” comprises primarily older tankers, many of which have not undergone recent inspections and lack proper maintenance. Ownership of these vessels is often unclear, and they frequently operate without adequate insurance coverage, seeking to evade sanctions and mitigate high insurance costs. This increases the risk of oil spill or collision. This could also result in a participating shipowner evading its liability under the relevant liability and compensation treaties.
However, even for mainstream trades, the cost for environmental compliance in the form of EU ETS, combined with FuelEU maritime penalties for GHG emissions intensity undercompliance from 2025 are currently calculated to be relatively insignificant compared to spot freight levels and future levels than can be secured on physical periods. However, the relative cost compliance burden to freight inflates in a poor freight market environment. Therefore, today’s hot market might be creating a significant volume of pent-up scrapping for the future, when demolition may take off due to either the arrival of stricter regulation or poor freight.
Tanker contracting stimulated
2023 was the first year that tanker contracting outperformed annual deliveries, after a sequential underperformance over 2015-2022, supporting an upward trend in newbuild prices. So far in 2024, contracting has accelerated, so on an annualized basis it is more than 5 times above annual deliveries. This year (Jan-May) has so far seen 175 firm orders for vessels above 34,000 Dwt, an almost 39% y-o-y rise.
Approximately 45% of these orders were registered during April-May with a combined 78 orders, the highest level for this time of year since the same period in 2006. Meanwhile, approximately half of this year’s contracting is scheduled to be delivered in 2026, with Chinese shipyards dominating the deliveries. At this pace of contracting, annualized orders are running at 400 vessels per annum, although some seasonal slowdown is likely to bring this number lower as we head into Q3. This comes against the background of a three-decade low level of deliveries scheduled for 2024 at 79 vessels.
This means that the share of new contracts over deliveries could be set to break another record this year. However, as most of the new orders are placed at Chinese yards with a lower cost base, the impact on top tier newbuilding prices could be less pronounced, as the former gradually covers the gap to the top tier newbuilding price ceiling, BRS Shipbrokers concluded.
