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Poor earnings prompt VLCCs to cut costs by idling, slow steaming

Weak or negative returns for VLCCs hauling crude from the Persian Gulf to North Asia are prompting shipowners to adopt cost-cutting measures like curtailing sailing speed and idling their ships near Singapore or Sri Lanka’s port of Galle, freight market sources said March 15.

The current time charter equivalent (TCE), or earnings for a voyage on the benchmark Persian Gulf-China 270,000 mt route, is currently around $2,000/day for a super-eco VLCC, while returns are negative for many ships delivered prior to 2019, a VLCC broker said.

Scrubber-fitted VLCCs burning cheaper high sulfur bunkers are also earning next to nothing, market participants said.

“We’re are parking our vessel in Singapore and Galle until there is a change in the market. We make more money sitting idle than fixing current rates,” a VLCC owner said.

The cost of moving crude on VLCCs on the key PG-China route was $5.34/mt March 12, the lowest since August 2017, according to S&P Global Platts data.

The Asian VLCC market has been battered by the drastic drop in the monthly spot cargo counts out of the Persian Gulf due to the coronavirus pandemic and the extension of OPEC+ production cuts into April.

Adding to shipowners’ woes is the steep backwardation in the crude market, which has incentivized the destocking of VLCC floating storage units. This has released many VLCCs into the spot market and exacerbated tonnage supply. Vessel availability is such that charterers see more than 10 offers from owners every time a cargo is quoted in the market, sources said.
Slow steaming to save costs

Many shipowners said they have chosen to slow steam at 9 knots on the ballast leg as bunker consumption rises exponentially when speed increases.

The spread between the Marine Fuel 0.5% bunker and high sulfur bunker prices at around $110/mt has resulted in ships without scrubbers losing out to the scrubber-fitted tonnage in securing cargoes.

“In the current market, only eco plus scrubber-fitted ships can do runs at current rates. All other ships [modern and old] including those that are only eco and only scrubber-fitted, will still lose money,” a VLCC broker said.

Some owners are shying away from fixing cargoes due to the paltry earnings in recent months in anticipation that collective resistance could help push up the market.

Fundamentals are so weak that despite the recent attack on a petroleum tank farm at Saudi Arabia’s Ras Tanura crude loading port, owners are unable to press for higher freight rates citing the geopolitical tensions in the Persian Gulf.
To lay-up or not to lay-up

“For time being we have not heard of lay-ups as owners remain optimistic of recovery eventually coming,” a VLCC chartering source said.

While there was some talk of laying-up ships, many participants do not see it as an option.

“It is not an easy decision for owners to lay up the vessels. There is a cost for laying-up vessels and coming out of a lay-up. I have not heard any owner mentioning the lay-up option; they are trying to mitigate the losses while keeping vessels moving,” a VLCC broker said.
Recovery in sight?

OPEC, in its monthly oil report released in March, said recovery would be backloaded in the second half of the year and has revised up its forecast for 2021 oil demand by 220,000 b/d to 96.27 million b/d.

“Going forward, with increased business activities, lower new COVID-19 cases and increasing vaccine rollout, the global oil demand is poised to grow strongly this summer,” Platts Analytics said in a report. This could offer some hope to VLCC owners.

“The crude inflow would be expected to rise perhaps toward the end of Q2 as product inventories down the chain start to decline amid heavy maintenance and recovering demand,” Platts Analytics added.

In addition, the tanker fleet is aging given the slowdown in new tanker orders and the sharp decline in scrapping over the past few years. There are currently 177 VLCCs that are 16 years of age or older, providing a large base of scrapping candidates, Platts Analytics said.

“The industry buzz has been all about large-scale scrapping of tankers, but so far, it has been all talk and very little walk, as the second-hand market has proved a much-preferred alternative,” Peter Sand, BIMCO’s Copenhagen-based chief shipping analyst, said in his latest report.

A demolition spree is easier said than done. “The attractiveness of scrap steel prices around $450/LTD offered by breaker yards on the Indian sub-continent easily vanish when compared to $24.5 million being paid for a 2002-built VLCC in the second-hand market,” he said.
Source: Platts

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