While the tanker market was previously counting on the implementation of the IMO Ballast Water Management Convention in September 2017 to raise scrapping levels amidst low earnings as well as high retrofit costs (US$1 to 2 million), the Marine Environment Protection Committee (MEPC) recently decided to delay its implementation by two years. The convention requires all existing vessels to install approved Ballast Water Treatment Systems at the first renewal of the International Oil Pollution Prevention (IOPP) survey after the enforcement date.
The delay is expected to slow demolition activity over the next few years, subsequently postponing any substantial recovery in tanker rates which have been heavily pressured by the perennial state of tonnage oversupply.
According to BIMCO, 2.6 million dwt of tanker capacity was sold for demolition in 2016 while 1.3 million dwt was demolished from January – April 2017. While overall demolition levels in 2017 are expected to outpace that of last year, the relentless pace of newbuild deliveries and recent uptick in orders still point to weak supply side fundamentals.
At present, vessels older than 15 years account for around 23% of the overall crude tanker fleet. The presence of older tonnage has weighed heavily on freight rates by offering significant discounts, with spot VLCC rates for the benchmark AG/Japan route currently around 48% lower than at the beginning of the year. The evident reluctance of ship owners to scrap ageing tankers spells a long way to recovery for the tanker market.