John Fredriksen’s Frontline is expecting an acceleration in scrapping to underpin a recovery in the crude tanker market from next year.
Frontline Management chief executive Robert Hvide Macleod says both the poor market and rising scrap values are encouraging a rise in demolition activity.
“We expect vessel scrapping to pick up as we progress through 2017,” Macleod said, noting spot rates have slumped to the lowest level in three years.
“The current pain should be a gain for the crude tanker market further out,” he said on the owner’s second quarter conference call.
The executive explained that a year ago a 17-year-old VLCC would have commended around $12m for scrap, in the region of $10m less than it would have fetched from a trading sale. Today, this gap is down to around $2m.
“The combination of a poor spot market and a 50% year-on-year increase in scrap values seems to us to be the perfect catalyst for scrapping,” Macleod said.
“Combined with oil demand, scrapping is definitely a main factor in the development of the tanker market.”
Frontline notes that the number of veteran vessels suitable for scrap is similar to the 99 VLCC newbuildings presently on order.
“A lot of focus has been placed on vessels ordered earlier this year for delivery in 2018 and 2019 but it is scrapping that will determine the longer term outlook for tankers,” Macleod said.
“We believe that it will outnumber new deliveries. It also looks likely to us that many options will not be declared.
“We therefore believe the market will begin to tighten in 2018 as vessels are retired from the global fleet and oil demand continues to grow.
“Despite current market weakness I continue to believe the market will begin to improve in 2018 as delivery of new vessels slows and scrapping picks up.”
Frontline today posted an adjusted second quarter loss of $0.03 per share, in line with what analysts had projected for the period.
