University Shipping Company VLCC Tanker Market Analysis Report

This report provides a comprehensive analysis of the VLCC tanker market, focusing on the status of the 14-year-old VLCC "Elli Nicola" for a shipping company. It examines the supply and demand dynamics, particularly within the VLCC segment, and assesses the financial implications of continuing to operate the vessel. The report calculates capital and operational costs, explores options such as recycling and selling to the second-hand market, and evaluates the potential of hot or cold lay-up strategies. The analysis includes a detailed breakdown of operational costs, revenue projections, and the impact of regulatory compliance on the vessel's financial viability. The report also reviews the tanker sale market trends and the factors influencing second-hand ship prices, offering recommendations on the optimal disposal strategy for the company. The conclusion suggests whether the "Elli Nicola" should be replaced and if the company should invest in a different market.

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Introduction
The sole purpose of this report is to advise the owners of the shipping company who
are in the business of dry bulk segments and tankers on the status of the 14 year old
VLCC “Elli Nicola” .. We are to find out whether or not the organization should
continue trading with it or completely remove it. The market for tankers is facing a
difficult period as there is oversupply in capacity which in turn has pushed the rates of
freight down. We will base this on the current condition and also calculate the capital
and operation costs so as to determine the loss or turnover in case the vessel will still
be operating. Thus we will try to offer the company two options that are recycling or
selling of the vessel to the second hand market. To add to this we will also look on the
scrapping of the market and determine if it is a good strategy for the company. The
company should also try to find a good arrangement for sale in the second hand
market. According to how things are, the hot or cold lay-up would be an appropriate
replacement. Finally we will suggest if the Elli Nicola should be replaced and the
company invest in a different market.
Tanker market analysis

SUPPLY/DEMAND
This report is dedicated to analysing the tanker market for the last 5 years.It is focused
mainly on the VLCC segment that is currently facing difficult times. The table below
shows that in the period of 2014-2017, crude oil demand went up. China is now
leading in importation of crude oil after surpassing the USA . (Abdullah, and AYAZ,
2018)
While the demand for oil is high, the supply of the same has been quite low due to a
decision to cut down on oil production in order to balance the market by (OPEC).
( Blaalid, 2016.)
Development of VLCC fleet

YEAR DEMOLITION FLEET FLEET %
2014 9 608 14
2015 3 625 16.4
2016 3 648 15.8
2017 12 696 11.6
2018 20 734 14.3
The table above shows that the number of VLCC fleet has expanded significantly
through the vessels number and the dead world tonnage. Most of ship owners have
increased the dead world tonnage to their fleet due to the high demand for oil which
raised the demand for tankers. During this period there has been more delivery of
vessels while demolitions have been few. This in turn has led to oversupply in
capacity. (Adland, Cariou, and Wolff, 2016)
REVENUE OF VLCCS
YEAR REVENUE $ CHARTER RATES
2014 31013 31413
2015 63835 41832
2016 42490 31780
2017 17800 27934
2018 6105 27230
The chart above indicates the revenues per day that have fallen below the $10000
mark as of 2018. This implies that the current revenues are at 85% below the average

of 2000-2017.For 2015 period the tank owners made profits as both demand and
supply were balanced. As we approached 2017 the balance reduced due to decrease in
demand for vessels occasioned by growth of fleet.( Bai,. and Lam, 2017)
This trend of fleet expansion coupled with low scrapping has benefited the market for
a short while until the point the market is now saturated. Thus in order to rebalance
the market scrapping has to go on.
Keeping the vessel cost analysis
The main target of this analysis is to determine whether the vessel will be a cost to the
company or if it would generate revenue if kept. For a 14 year old VLCC, the daily
freight rates range from $21,000 to $26,000. If we consider the average off hire period
to be 22 days for the year, the annual return would be between $6,750,000 and
$8,400,000.( Duru., Clott, and Mileski, 2017)
2015 % 2016 % 2017 % 2018
MAPPING 4120 1.4 4215 1.8 4260 1.8 4280
REPAIRS 2150 1.9 2090 1.9 2200 2.1 2150
STORES 3170 1.4 3205 2.0 3340 1.9 3040
INSURANCE 1235 0.7 1256 0.4 1266 0.8 1387
MANAGEMEN
T
1343 1.1 1150 0.6 1370 1.3 1132

The above table factors in the operational costs. The cost has been multiplied over years. The
cost of capital is arrived at by deducting the scrapping value from the second hand value ($24-
$18) The resulting $6 million is the divided by the ships remaining life of 6 years and therefore
the annual depreciation is $1million. (Dai, and Zhang, 2015).
OPERATION COST $
MAPPING 1547150
MAINTENANCE 804150
STORES,SPARES 1237450
INSURANCE 513350
MANAGEMENT 457590
DEPRECIATION 1000000
TOTAL 5559690

Based on calculations the expected annual revenues would range between $1.3 and $3 million.
The vessel is required to undertake the special survey after 5 years and thus the issues of
treatment of water system, ballast water system installation will have to be done whether there
will be dry docking or not. There was a proposal to reduce the sulphur oxide emissions levels in
2016 and thus most of the vessels will have to be installed with a cleaning system for their
exhaust pipes.( Lee, and Yip, 2018) In complying with these new regulations, the company must
therefore make a decision of whether to invest on all this requirements at a cost of between $7 to
$11 million. The best period for the company is when the annual revenues are amounting to $3
million and considering the cost of these new requirements amounts to $7M, it would take the
company roughly two and a half years to fully implement and comply with the new regulations.
Disposal of the vessel
The cold lay-up solution
The laying up of a vessel is an alternative method of saving cost in a situation where the rates of
the charter are lower than that of operating a vessel. The purpose of this is to wait for he right
time to recycle or sell the assets.in considering the cold lay up the company will have six months
to try and sell on the second hand market. This method provides for a minimised insurance and
registry, repair and maintenance and other running costs which may lead to a decrease of up to
75%. Assuming that this process will cut down the cost by 75%, the cost of operation will be

$560,000 for the six months. We must factor also the depreciation that is about $500,000 and
therefore the total cost involved in keeping the ship will be around $1 million. (Li, Xue, Chen,
Chen, Miao, Shao,and Zhang,2018)
The company has a strategy of keeping the vessel for six months during which they will try to
sell.it is expected to bring about $26 million. When the period is over and the ship is still for sale,
the company will consider selling it for scrapping. In arriving at this decision, the company has
evaluated the two options in which they would get $26m if they sell and if they don’t after the
said period, they would get roughly 17m according to the market value and also after deducting
$1m that they will have paid in keeping in the vessel in cold lay-up.
Tanker sale market
Freight rates are the most influencing factor in the second hand market for tankers.
YEAR 15 YR OLD SECOND HAND MILLION($)
2014 29
2015 38
2016 24
2017 24
2018 25
As evidenced above, prices for second hand ships have greatly reduced over the last few years..
This is due to the fact that in 2015 there was a strong freight market due to a drop in price of oil
and a supply growth that is slow .In 2016 there was an increase of 6% in fleet growth as
compared to the previous year that brought about an imbalance in the market. The supply of oil

continued to grow despite numerous disruptions. The demand for tanker was relatively low due
to a drawdown of oil and its products. From the numbers witnessed so far, the demand for
tankers is expected to increase as we go by.
The tanker market greatly suffered during the year 2017.A total of 56 VLCCs have been sold
into the market since 2017 to April 2018.it is important to note that this has been done despite
the prices of vessels decreasing for the second year running due to low revenues in the market
sector.( Lim, and Yun, 2018)
For the tanker business a total of 335 vessels were in the market bringing in about $7.4bn in
2017 as compared to 2016 where there were 308 ships with an income of $6.4bn.
To add to this, the market expectations, inflation and age of the ship are critical dependents of
the performance of the vessels.it is the norm for the price of the vessel to go in one direction with
that of the freight rates and therefore it is important to note that the market can be volatile at
times The expectations of the market is a key factor that determines how the market goes.in case
of a season where there is adequate market, the prices of second hand vessels will be almost at
the same point as that of new ones. In the case of low market then the prices of second hand
vessels almost be the same as that of the scrap. Also if a vessel is sold in the market, then the
price at which it is sold will be used to as a benchmark for the rest.
For those companies that are in the business of purchasing VLCC ships, they need to take
advantage of the slight difference in the prices of scrap value and that of second hand. If e take
for example a look into a company known as Foresight, we notice that it bought around 6 vessels
that were 15 years old having considered that their assets prices are slightly different from the
scrap ones. The company can within 5 years send the ships to the scrapyard and with that get

profits in the form of cash operations inflows.( Lyridis, Manos, Zacharioudakis, Pappas,. and
Mavris, 2017)
The price in 2018 for a 15 year old vessel is at an average of $25mfor example the VEGA
TRADER as it was commonly known that was built in 2014 was recently sold for $21m Another
one is the TAGA that was sold at $27m.
There are several investors looking for vessel such as the Elli Nicola and thus the strategy of
putting the vessel for six months before sending it to scrap is way to convenient.
Vessel dismantling
Having considered the disposal option of Elli Nicola in the second hand market, we should also
take a look into recycling the vessel. There are several factors such as high scrap
prices ,regulation hurdles, freight rates that are low which may influence to decide on recycling
For our case it is very clear that the maintenance and operation cost of the vessel are increasing
as the vessel gets older. Furthermore if we consider the maintenance cost as well as the expenses
that are unavoidable when complying with the regulations, it is very clear that the vessel is an
excess cost to the company and thus the company should take into considerations the market
conditions of scrap and seek advice from a specialised broker for a comprehensive valuation of
the vessel.
The company can pursue two different channels for disposal by scrapping. The first one is for
them to sell the ship directly to a ship breaker. The second option will be for the company to sell
to cash buyers who ill in turn act as a middleman between the scrapyard and the ship owner. In
selling the ship to a cash buyer, the company may be able to benefit by introducing the clause of
“as is, where is” in the sale contract. This clause means that the purchaser of the ship will buy the

ship on the condition it is without any guarantee on the quality of the ship at the time. On the
other hand, the ship owner is under no obligation whatsoever to transport or bring the ship to the
buyer.( Wu, Yin, and Sheng, 2018)
MARKET CONDITION FOR VLCC SCRAP
The impending cap on sulphur emissions and the regulations that are being put in place regarding
ballast water has brought a lot of consequences in the VLCC market. This has been further
heightened by the lack of job opportunities in the tanker business. According to a research
carried out, it was noted that in 2018 alone.19 ship vessels were scrapped while only 13 were
demolished in 2017.The prices of steel in countries such as India have risen to their highest point
which is at $440 .This is about $18 for each VLCC. It is important to therefore note that the
vessels that were considered for demolitions in 2018 were much younger as compared to those of
2017. Furthermore, a critical component that is considered in the business of scrapping is the age
of the VLCC fleet. This is to say that in the coming year, many of the vessels that were
constructed in the year 2000 would be headed to the scrapyard. The average age of the VLCC
vessels taken for scrapping in 2018 is 18 years while that for 2017 averaged 21 years.
DEMOLITION PLACE
The displacement light tonnage and price of steel are variables that determine the total value of
scrap in the vessel that will be recycled. There are several major places that are used for ship
dismantling. These areas include Gadani in Pakistan, Aliaga in Turkey, Chittagong in
Bangladesh and Xinhui and shanghai in China.The volume of ship scrapping for April 2018
declined by 91% from last year figures. The scrap yards in China right now are not able to
compete on the price front with their rivals in South Asia. (Yang Liu, Sun, and Li, 2015.)

Scrap price that has been presented in 3 months of 2018 has been relatively high in south Asia.
The table shows that Turkey and china gave out prices of scrap as $ 270 and $ 260. This is way
below that of south Asia who normally pay double that. We must note however that the prices
may go u or down due to factors such as import duties, demand for steel locally or even labour
cost differences. Also we need to consider the implementation levels that were agreed about in
the Hong Kong Convention in order to minimise any form of threat to the company reputation
The convention also provided that the ship companies should not pose any form of threat to the
health and environment in the course of their work as a result of this most of the ship owners in
the industry have moved to adapt the standards and rules spelt out. In India of the total 120 yards
operating,41 of them have conformed to the HKC standards. A further 15 are working on
meeting the conditions. Thus when we consider the prices of demolitions and the fulfilment of
required conditions, we can come to a conclusion that the best country for the demolition of a 14
year old Elli Nicola tanker would be India.