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Tanker owners resort to idling VLCCs as returns fall below operating costs

Singapore — The lingering oversupply of vessels in the VLCC market has left shipowners weighing options to either idle, reduce sailing speed extensively or take on only short voyages as freight returns are seen below operating costs.

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The Time Charterer Equivalent or TCE, which is the earnings accrued, for a modern VLCC has slumped to around $7,000/day on key Persian Gulf to North Asia routes, which hardly covers the daily running cost of the vessel, according to market participants.

To tide over the staggeringly low earnings period, two shipowners told S&P Global Platts that they have resorted to drifting their vessels to save fuel cost. When a vessel is made to drift in a safe location, the power to the main engine is switched off to save on fuel expenses.

"It makes no sense for owners to accept further lower freight levels at the current TCE levels," a VLCC owner said.

Some shipowners are contemplating to avoid working on any cargoes until the freight returns improve to levels that would cover the operating expenses.

"With earnings so low, [a few shipowners are] doing short voyages, so that the pain is over a lesser amount of time. Not everyone can afford to stop ships," a shipbroker said.

The current TCE has fallen massively from levels seen in January, when owners pocketed around $40,000/day.

The anemic earnings are a result of the early onset of the Asian refinery turnaround season along with the slowdown in US crude exports as well as the flood of newbuilding VLCCs during the first quarter of the year.

So far this year 20 new vessels have been added to the VLCC fleet out of the estimated delivery of 54 ships with fewer vessels deleted to offset the tonnage growth.

"Initially, owners will slow steam to cut bunker costs. [Owners are running vessels] at 12-12.5 knots for laden and 9-11 knots on the ballast [leg]," a second shipbroker said.

Meanwhile, shipowners are yet to resort to laying-up of vessels, a strategy adopted when freight levels are insufficient to cover the running costs.

"When the earnings is below $5,000/day, the owners will start laying-up the more expensive ships in the fleet," the second shipbroker said.

"People will not do lay-up now, but just not fix and wait. Waiting is cheap at current rates," a second VLCC owner said.

Some shipowners are compelled to keep their vessels running due to their business models, while others are opting to keep their vessels waiting at Fujairah in the Persian Gulf or Galle at Sri Lanka's west coast, market sources said.

"Slow speed is already happening and people just prefer to wait than fix. What you may see soon is a bit more activity on the VLCC scrapping," a third VLCC owner said, adding that "lay-up is not a usual option and is the last resort".

Despite shipowners with modern VLCCs resisting to fix their vessels, the stiff competition from those with "handicapped" ships has allowed charterers to pick tonnage at very cheap freight levels. The ships coming out of dry-dock and with fewer approvals from oil majors or inspections by marine industry forums are termed as handicapped vessels.

Platts assessed the key PG-China rate at Worldscale 36.5 on Thursday, basis 270,000 mt, which is equivalent to $6.87/mt, down by w26.5 from when Platts had assessed the rate of the same route at w63 on January 2.

--Vickey Du, vickey.du@spglobal.com

--Edited by Norazlina Juma'at, norazlina.jumaat@spglobal.com