April 23, 2021
There have been a few news articles lately discussing the strength of the secondhand VLCC market, in spite of overall VLCC earnings remaining very low in an oversupplied market. This paradoxical market behavior is raising some very valid questions. Who buys these VLCCs, what are they doing with them and why are they not being scrapped, especially now that iron ore supply chain volatility among other reasons has brought scrap prices to high levels? To answer these questions, we dove into our AIS and commercial transaction information to observe the “behavior” of VLCCs over the age of 15 that have been sold for further trading since January 2020.
Looking at these older ladies, we discovered a clear upward trend in acquisitions regardless of their intended purpose. The buyers of these ships are generally considered “low-profile” players, usually without an established fleet. A lot of these acquisitions in the first half of 2020 were destined for floating storage, something that makes sense given the oil market conditions at that time. At the same time, a number of ships were found empty at anchor, something that likely denotes the sale has taken place very recently.
After these categories, things get interesting. There is an increasing trend in ships turning off their AIS transponders or seen loading in Iraq or Southeast Asia (Figure 1). These locations -especially the latter- are regarded as “proxies” for the Iran crude trade. It is a well-known strategy for VLCCs to load Iranian crude via ship-to-ship transfers (STS), combined with turning off AIS, in order to circumvent the US sanctions in place. If we add these categories up, we see that more than 25% of these recently sold ships (>15 years old) could potentially be involved in this trade.
This makes sense for both sides. If a shipowner is offered US $3-4 million over scrap price for older tonnage, they are likely to sell to the highest bidder. If then the ship is indeed engaged in Iranian crude trade, it is probable that it will not follow current market freight rate structures. However, this situation could change very rapidly if the US Administration removes the sanctions on Iran. Once the international VLCC fleet can legally trade Iranian crude again, chances are that all those secondhand vessels will be pushed away, this time to scrapyards. Furthermore, we have concluded (and shared) in a recent blog post, that the impact from Iranian Sanctions relief would be a net positive for crude tanker earnings.
Figure 1 – Observed Status of VLCC Vessel Following a Secondhand Sale
Source: McQuilling Services