Scrubber-equipped VLCCs shine in a weak market – ShipInsight

Shipping analyst Vortexa reports how scrubber installations have shaped the employability and demand of VLCC tankers in a globally depressed crude oil freight market.

Before the pandemic, the most important questions of the shipping industry revolved around the IMO 2020. Specifically, the main concerns concerned the delivery quantities of the newly introduced low-sulfur heating oil (LSFO), which created the dilemma: to scrub or not to scrub?

After the devastating effects of the pandemic on the shipping industry, energy revenue and IMO 2020 regulations have almost faded into the background in the minds of market participants. Overall, VLCC earnings remain in the doldrums early in the fourth quarter. However, it appears that those who took the bet of installing / retrofitting a scrubber were able to maximize their earning potential in the gritty environment.

With its cargo analysis, Vortexa has been able to differentiate the development of tonne-kilometers between VLCCs with and without a scrubber over the past 2 years.

During the floating storage boom in Q2 2020, when crude oil and, in turn, bunker prices plummeted, tonne-miles of VLCCs without scrubbers peaked. This surge in employment was reflected in the exploding freight rates at the time. Since then, however, the demand for VLCCs running on LSFO has dropped dramatically (and stayed below the 2-year average).

Conversely, the ton-miles for VLCCs with scrubbers show more stable behavior during this 2-year period as they appear to do better amid current market events.

This is reflected in the graph below, where the data clearly reflects that VLCCs with scrubbers have gained market share over time over their non-scrubber counterparts.

The proportion of VLCCs equipped with scrubbers hit a low of 37% at the end of 2019 due to the higher VLCC rates during that period, which allowed shipowners to withstand a higher LSFO-HSFO range. In addition, the lower market share is partly due to the fact that more and more scrubber installations were in use before the implementation of IMO 2020.

In 2021, however, the market share of scrubber-equipped VLCCs hit two monthly highs of 47%, in an environment where market dynamics differed from a year ago. On the one hand, the LSFO bunker prices are again at a higher level, but at the lowest level in the last 3 years.

This is an undesirable combination for the balance sheet of shipowners with non-scrubber VLCCs as returns were negative for much of the year. Conversely, shipowners with scrubbers gained a competitive advantage in this environment, as they were exposed to the lower HSFO bunker prices. In this way, they are able to offer cheaper tariffs on the available cargoes in order to win business and keep their jobs.

The increased supply of VLCCs equipped with scrubbers has also contributed to the latter’s growing market share. In 2021, 26 of the 29 VLCCs delivered to date were equipped with a scrubber.

Using the average of the LSFO-HSFO spread across the most important bunker nodes using price data from Argus Media, Vortexa calculated an average spread of approx. 85 USD / t for the month of October 2021. Compared to around 120 USD / t in August 2021, or a decrease of 30% since. Overall, the average for the last 12 months is still just under $ 100 / t or 15% above the current level.

Even with a falling spread, the prices remain at a competitive level compared to an investment in scrubbers with an attractive payback period. The HSFO demand at the most important bunker hubs has remained strong, which ensures a steady supply of flushed ships.

Looking ahead, Vortexa said its data suggests that VLCCs with scrubbers will continue to benefit from a low rate environment, competitive distribution between fuels at large bunker centers in favor of HSFO, and an industry-wide lack of investment in refineries based on LFSO production units be converted, will benefit. While the earnings environment remains weak for shipowners, a market participant with a scrubber will be more involved.

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About Christine Geisler

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