Frontline proposes VLCC scrapping fund

Without a reduction of ships, the VLCC rates won't improve anytime soon. The world's largest tank ship operator, Frontline, calls on the entire industry to join forces to establish a scrapping fund.

There's a surplus of about 70 ships in the global fleet of VLCCs, but even though the industry acknowledges the massive overcapacity, no one seems to be doing anything noticable about it.

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That's why Jens Martin Jensen, CEO of the world's largest tanker carrier, Frontline, proposes that the industry joins forces to establish a fund where VLCC carriers can have their ships scrapped at an attractive premium. One of the problems right now is that scrapping ships is not very financially attractive. Another problems lies with the fact that the individual carriers are afraid of being the first ones to scrap a young vessel, out of fears that competitors won't follow suit. Frontline plans to scrap VLCC tonnage of approximately 15 years of age.

"We're all burning our money in this market and something needs to happen. This could be a pool that offers a few million USD in premium. Instead of a price of USD 16 million on the scrapping market, for instance, the fund would offer USD 18 million," Jens Martin Jensen tells ShippingWatch.

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"We ought to be able to earn back the extra price or price difference through a market improvement in the short term. It's probably a naive thought, but at least it'll give people something to smile about," he adds.

New ships on the way

While Frontline is sending fairly new ships to be scrapped, newly established Frontline 2012 has been placing large orders, a total of 60 ships are on the way, the first of which joined the fleet on September 9th. The ships include MR and LR (12 and 10 of each) as well as tonnage for the expansive gas market, for which Frontline has ordered another eight VLGCs and a considerable amount of capesize bulkers.

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Jens Martin Jensen says that Frontline does not want to "scrap the total fleet with the one hand while using the other hand to acquire a new, cheaper, more environmental fleet": The contracts that have been made were made at the right time, he says.

Maersk Tankers CEO Hanne B. Sørensen has previously told ShippingWatch about the urgent need to reduce the capacity. As things are looking now, Maersk Tankers plans to divest all of its 21 VLCCs, which are estimated to raise USD 1.5 billion for the carrier. And the general market consensus indicates that the price depends entirely on whether the carrier can find a buyer for the ships.

The scrapping fund could, for instance, have set age limit of 15 years, as the number of VLCCs above that age corresponds more or less to the overcapacity, as there's a total of 69 VLCCs in the market that are more than 15 years old. However, there 60 new ships in the pipeline, for delivery before mid-2016.

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