Frontline CEO: Scrapping could keep VLCC growth close to zero this year

The number of supertankers sold as scrap so far this year bodes well for the strained VLCC market, says Frontline CEO Robert Hvide Macleod. Spot rates reached a new low last week, reports JP Morgan.

Photo: Frontline

Things are so far moving in the right direction in terms of supertankers sold as scrap this year, says Frontline CEO, Robert Hvide Macleod, noting that 2018 could see a large number of VLCC vessels scrapped in a market severely strained by global overcapacity.

"In today's highly challenged spot market for ships older than 17.5 years, and with strong values in scrapping, this creates significant activity and interest in scrapping," says Macleod in a written response to ShippingWatch's questions.

Seven supertankers have so far been sold as scrap in 2018, noted Frontline recently in relation to its annual report. A level that looks "very promising," according to Macleod.

"This is double the amount at the same time last year, and we expect that 2018 will be a year with a lot of scrapping. Between 30 and 40 VLCCs is not unrealistic, and it could keep fleet growth at close to zero this year."

Including postponed deliveries, he projects that around 40 new VLCC supertankers will hit the market this year.

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"Scrapping finally a real alternative," writes Frontline in its 2017 presentation released Feb. 28. The graph shows the development for the secondhand price on a 15-year-old VLCC vessels as well as the scrap value. | Photo: Kilde: Frontline webcast 28. februar 2018

Gibson Shipbrokers recently estimated that fleet growth this year could continue at the same pace as so far, and the broker also wrote in a market report that scrapping of end-of-life vessels will not be able to follow the pace of newbuild deliveries in 2018.

Since the beginning of 2016 the global fleet of VLCC supertankers has grown by almost 80 ships up to 720 ships in the beginning of 2018, noted Gibson in the market report published in early February.

JP Morgan: new low for spot rates last week

Frontline – controlled by John Fredriksen – finished last year with a large deficit.

A USD 117 million profit in 2016 became a USD 264.8 million loss the following year, and one crucial factor can be found in the large impairments booked on nine VLCCs.

Frontline books large deficit for 2017 

Revenue was reduced by almost USD 110 million and Macleod said in the report that particularly the fourth quarter had been difficult.

In the final quarter last year, the carrier dealt with weak spot rates due to the crude oil stockpiles, and the weak rates hit a market that was already impacted by high fleet growth.

In March, the rate level for VLCCs still looks very low. JP Morgan wrote in a market update this Monday, that daily spot rates had reached a new low last week due to a weak market in the Middle East, and the rates fell to an average of just USD 3,100 per day.

The VLCCs make up a vital part of the carrier's activities. Of the 60 vessels on the fleet list, 21 are VLCCs, while the rest include Suezmax, LR2 and Aframax ships.

"We believe the VLCC fleet has around 40 to 50 ships too many. With expected growth in freight demand for 2018, it would not take that much to improve the balance. Three percent of the fleet will be older than 20 this year, and that could be enough to find balance, assuming that there will be an expected growth in demand," writes Macleod to ShippingWatch.

The CEO says that another significant reason to scrap older tonnage relates to the environmental requirements that will take effect in coming years. Decisions about sulfur and ballast water are enough to increase motivation to remove ships from the fleet, says Macleod.

"We regularly assess the decision between scrubbers and using low-sulfur fuel, but it's clear that for older vessels with high consumption, it is less likely that big investments will be made," says Macleod.

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Photo: Frontline
Photo: Frontline

While Frontline's CEO thus expects the number of VLCCs in the world to shrink this year, this will also be the vessel type in which the carrier grows exposure going forward.

In this regard, the offshore company was involved in one of the more notable stories in the shipping industry last year, as Frontline repeatedly tried to take over tanker carrier DHT Holdings, but was unsuccessful every time.

Frontline abandons corporate acquisitions and bets on own fleet 

Despite the failed corporate takeover, the situation did not diminish Frontline's ambitions to someday make more acquisitions.

"We are continuously assessing opportunities to increase exposure, particularly toward the VLCC segment. How this might happen is hard to say now. We want to seek out the best deal for our shareholders," says Macleod, explaining that he deems Frontline's current fleet size competitive in today's market.

"We think the spot market will be challenging going forward, but we have critical mass in all segments where we operate. Given that the market is where it is, we're pleased that we're not bigger. But when we see the fundamentals start to change and improvement start coming, then we'll be ready to act when growth opportunities arise."

English Edit: Daniel Logan Berg-Munch & Gretchen Deverell Pedersen

Frontline hopes for better tanker market in late 2018 

Frontline books large deficit for 2017 

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