Capesize Dry Bulkers May Receive A Boost From VLOC Scrapping

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Includes: DRYS, DSX, GOGL, NM, NMM, SB, SBLK
by: Morningsidepark

Summary

The VLOC Stellar Daisy (built 1993) sank off the coast of Uruguay on March 31st. The vessel was owned by Polaris Shipping, the South Korean owner of 25 VLOCs.

A second 1993 built Polaris VLOC (Stellar Unicorn) is moored off of Cape Town and listed as "Maneuverability Restricted" due to cracking on its deck.

Polaris owns 19 VLOCs built in the 1990s with an average age of 23.5 years. If the Unicorn is forced to retire, it signal accelerated scrapping of older VLOCs.

Dry Bulk Time Charter Equivalents recently hit two year highs in late March. Accelerated crapping of the VLOCs may provide additional support to Capesize and Newcastlemax TCEs.

In a recent article about DryShips (NASDAQ:DRYS), I mentioned that the loss of a Very Large Ore Carrier (VLOC) named the Stellar Daisy (b. 1993) could have an impact on Capesize and Newcastlemax rates if it resulted in the accelerated scrapping of the 1990s era VLOCs. Two survivors of the sinking stated that

"the ship listed, split in two and sank in high seas after cracks on the main deck led to water ingress."

The Stellar Daisy was owned by Polaris Shipping of South Korea. Polaris, per its website, is the largest operator of VLOCs at 7.85 million dwts, followed by Berge Bulk at 7.56 million dwts, and COSCO Shipping at 6.45 million dwts. Ex the Stellar Daisy, Polaris owns an additional 19 VLOCs that are converted VLCCs originally built in the 1990s with an average age of 23.5 years. Polaris also owns 5 VLOCs built between 2014 and 2016 and have two VLOCs under construction. Clearly though, the bulk of Polaris' VLOC fleet are the increasingly decrepit conversions built on 1990s era hulls. The following is a list of the Polaris VLOCs in service with the original service date as a VLCC.

DWT Year Built
Stellar Fair VLOC 266,629 1990
Stellar Cosmo VLOC 261,310 1992
Stellar Daisy VLOC 266,141 1993
Stellar Eagle VLOC 278,258 1993
Stellar Galaxy VLOC 263,130 1993
Stellar Liberty VLOC 289,331 1993
Stellar Neptune VLOC 289,663 1993
Stellar Unicorn VLOC 279,022 1993
Pacific Ruby VLOC 265,647 1993
Stellar Hermes VLOC 301,550 1994
Stellar Journey VLOC 263,097 1994
Stellar Magic VLOC 298,338 1994
Stellar Ocean VLOC 305,436 1994
Stellar Pioneer VLOC 298,624 1994
Stellar Queen VLOC 304,850 1994
Stellar Rio VLOC 298,445 1994
Stellar Samba VLOC 289,700 1994
Stellar Topaz VLOC 298,467 1994
Stellar Iris VLOC 281,199 1995
Stellar Knight VLOC 298,778 1995
Stellar Venture VLOC 250,005 2014
Stellar Way VLOC 250,015 2014
Stellar Young VLOC 250,063 2014
Stellar Ace VLOC 300,660 2015
Stellar Banner VLOC 300,660 2016

Unfortunately for Polaris, a second 1993 vintage VLOC, the Stellar Unicorn, is currently "Maneuverability Restricted" off of Cape Town, South Africa, due to similar deck cracking. If Polaris is unable to repair the cracking and prove the Unicorn is seaworthy, it will likely result in the close examination of its remaining vessels by insurance companies, shippers, and particularly shipping authorities in China since Splash 24/7 reports that the "Chinese Port State Control inspectors found six deficiencies on the Stellar Daisy relating to water tightness" prior to letting it sail to Brazil for its next cargo.

The bulk of Polaris' tonnage is represented by these aged VLOCs and it has stoutly stonewalled discussing the loss of the Daisy and the incapacitation of the Unicorn. It is therefore likely to balk at the prospect of scrapping its fleet early, so the impetus for such action will need to come from the insurers, regulators and shippers. Given the age of its vessels and recent events, I believe accelerated scrapping between now and yearend is inevitable.

Additional Information on VLOCs

A May 2016 article published in Hellenic Shipping included the following summary of the VLOC fleet:

"69 ships of 240,000 dwt and larger were involved in Vale iron ore export trades to China and numerous other destinations. All except one were actually in a range of 247,000 to 327,000 dwt. Converted former tankers numbered 32, almost half the total number, mainly 260,000 to 300,000 dwt, built in the 1990-1995 period and converted between 2008 and 2011."

"Many vessels Vale is currently using, VLOCs converted from tankers, probably will reach or approach their life-cycle end by 2020 or earlier. Among these, numerous ships were built in the years up to 1993, and so will be twenty five or more years old by 2018."

A number of these VLOCs were scrapped during 2016 subsequent to the article, but the remaining fleet probably numbers 50. If insurance becomes unavailable for cargoes carried by these vessels or if Vale retires or fails to charter these vessels going forward, it would have a positive impact on Capesizes and Newcastlemaxes and could result in higher near-term rates

Potential Impact on Rates

Although they have declined a bit during early April, Capesize rates are at a level not seen since 2015 after rallying off of seasonal lows in February due to robust iron ore demand from China. Based on vessels due for delivery during 2017 and factoring in a very muted scrapping environment across all sizes due to the rebound in dry bulk rates, the dry bulk fleet is estimated to grow at only 3% this year. Based on current orders, fleet growth will be even lower during 2018. Any accelerated scrapping of the VLOCs will nudge Capesize rates higher in the near-term. The primary risk to dry bulk rates would be a decline in iron ore imports due to a slowdown in steel demand or an increase in domestically sourced iron ore (less likely given imported iron ore prices).

The scrapping and retirement of 1990s vintage VLOCs was anticipated by shippers and ship companies and a number of new build orders for VLOCs was placed during 2016 and will be delivered during 2018 and 2019.

Navios Maritime Holdings (NYSE:NM), Navios Maritime Partners (NYSE:NMM), Golden Ocean Group (NASDAQ:GOGL), Star Bulk Carriers (NASDAQ:SBLK), Diana Shipping (NYSE:DSX), and Safety Bulkers (NYSE:SB) all own Capesize or larger vessels and could potentially benefit, to a greater or lesser degree depending on fleet mix) from this development.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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