Vortexa analyses how scrubber installations have shaped the employability and demand of VLCC tankers in a globally depressed crude freight market.
The scrubber bet pays off for VLCCs
Prior to the pandemic the main questions related to the shipping industry revolved around IMO 2020. More specifically, the main concerns had to do with the supply levels of the newly introduced low sulphur fuel oil (LSFO), which gave birth to the dilemma: to scrub or not to scrub?
Fast forward to Q4 2021, following the devastating impact of the pandemic on shipping industry, earnings for energy carriers and IMO 2020 regulations have all but taken a backseat in the mind of market participants. Overall, VLCC earnings remain in the doldrums as we enter Q4. However, it seems those having made the bet to install/retrofit a scrubber, have been able to maximise their earning potential in the dire environment.
Using our freight analytics we were able to distinguish tonne-mile developments between VLCCs with and without scrubbers over the past 2 years.
Global crude tonne-miles (in bn)
- During the floating storage boom in Q2 2020, when crude and in turn, bunker prices plummeted, tonne-miles of VLCCs without scrubbers peaked. This surge in employment was reflected in the skyrocketing freight rates at the time. Since then, however, demand for VLCCs running on LSFO has dropped drastically, (and have remained below 2-year averages)
- Conversely, tonne-miles for scrubber-fitted VLCCs exhibit more stable behaviour throughout this 2-year period, as they seem to fare better in the midst of current market fortunes.
This is reflected by the following chart, where our data clearly reflects that as time progresses, scrubber-fitted VLCCs have gained market share against their non-scrubber counterparts.
Contribution to global tonne-miles
LSFO-HSFO spreads across major bunkering hubs (Source: Argus Media)
- By averaging the LSFO-HSFO spread across major bunkering hubs, using pricing data from Argus Media, we arrive at an average spread of approximately $85/t for the month of October 2021. That compares with around $120/t in August 2021 or a drop of 30% since. Overall, the average for the last 12 months remains at close to $100/t or 15% above current levels.
- Even as with a falling spread, prices remain at a competitive level when comparing to an investment in scrubbers with an attractive payback period. HSFO demand across major bunkering hubs has remained strong, ensuring a steady supply for scrubbed-equipped vessels.
Looking ahead, our data suggests scrubber-fitted VLCCs will continue to benefit from a depressed rate environment, a competitive spread between fuels at major bunkering hubs in favour of HSFO and an industry wide lack of investment in refineries upgrading to LFSO producing units. Whilst the earnings environment for shipowners remains weak, a market participant with a scrubber on board will have a stronger hand to play.
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