2016 promises to be one of the busiest years in the history of ship recycling, said Anil Sharma, the president and chief executive officer of GMS Inc.
Shipbreakers are busy, he said, because there is simultaneous weakness in demand in three separate sectors–dry-bulk shipping, container shipping, and the oil industry where there is a need to scrap rigs and support vessels.
BIMCO forecasts 40 million deadweight tons of ships will be recycled this year, compared with 30 million deadweight tons in 2015.
Sharma’s company is the largest cash buyer of ships for demolition, doing more than 300 deals annually. Most ship recycling yards are located in India, Bangladesh, and Pakistan, with smaller numbers in China and Turkey.
The role recycling plays in the shipping is sometimes underappreciated, Sharma said.
Not only can it help balance supply of vessels with demand, but “if new buildings are coming in, you need to have an exit, and you need an exit which has value,” he said. If owners did not receive any money for the ships they scrap, the value of second-hand ships would fall.
The amount of containership capacity scrapped spiked upward in 2009 after the 2008 financial crisis. This year containership scrapping is again headed upward. In the first quarter 45 ships with 143,000 TEUs of capacity were reportedly scrapped. That’s a fast pace compared to the prior three years: 2013, 118 ships with 283,000 TEUs of capacity; 2014, 162 ships with 365,000 TEUs of capacity; and 2015, 87 ships with 191,000 TEUs of capacity.
Many more bulkers and general cargo ships were scrapped last year—421 ships with nearly 27 million deadweight tons of capacity. This year, there is a surge in cape-size bulkers, or ships with more than 100,000 deadweight tons of capacity. Sharma said as China has reduced steel production, transport of iron ore and coal has plunged, driving rates to historic lows. The Baltic Cape Index in the past year has ranged from a low of 161 to a high of 2,604—and as recently as 2014 it was above 4,000 and above 8,000 in 2009.
In April Sharma said there were 100 bulkers in lay-up, representing less than 1 percent of the global fleet. “Laying up a vessel also only kicks the real issue further away in the future. The only realistic way to eliminate supply-demand distortions in shipping is via recycling of older tonnages,” he noted.
The London-based consultant Drewry also expects an uptick in the number of containerships scrapped in 2016.
Drewry’s estimate is that ships with 195,000 TEUs of capacity were scrapped last year, “well down on the previous three years from 2012 to 2014 when the annual scrapping totals averaged nearly twice as much.”
It said 2015’s low scrapping volumes coincided with deliveries of new ships with capacity of 1.7 million TEUs, “serving to widen the supply and demand gap that is assisting the erosion of carrier profits.”
Owners of older ships that were candidates for scrapping “preferred to extend their lifecycles because demolition prices were less attractive and because there was some renewed demand for panamax ships, either for second-hand sale or time-charter as a consequence of a spurt of new regional services in the early months of the year, particularly in Intra-Asia, and to cover the U.S. West Coast port dispute,” Drewry said.
However, the consultancy added that “scrapping of containerships gathered momentum towards the end of 2015 and has continued into 2016.”
With the opening of the new locks in the Panama Canal and delivery of larger vessels, panamax containerships are among those “feeling the biggest squeeze and a lot of them are idling,” Sharma said.
In April both the G6 and CKYHE alliances announced plans to replace panamax vessels used on some of their Asia-U.S. East Coast services with neo-panamax tonnage.
Drewry said the average age of ships being scrapped is coming down: in 2010 and 2011 it was about 30 years; last year it was less than 23 years.
Still, Drewry noted “scrapping alone does very little to redress the supply-demand imbalance—last year’s scrapping total was equivalent to just 1 percent of the cellular fleet—but it does at least increase carriers’ ability to cascade smaller east-west operated ships into north-south trades by clearing space for them.”
The price scrapyards pay for ships reflects the price of steel, and Sharma said last year was one of the worst he had seen in 23 years of business because prices plunged so rapidly. Prices have since rebounded to about $300 per light displacement ton, but they dipped as low as $220 per ton, he said.
“Volumes were there, but every time you would buy an asset by the time you come to deliver the asset the price would be off by 10 to 20 percent,” he added.
Owners that couldn’t hold their vessels “had to scrap them at whatever price they could get. Owners that had holding power held on to their vessels,” Sharma said.
While groups such as NGO Shipbreaking Platform are highly critical of shipbreaking in the Indian subcontinent because of dangerous conditions for workers and pollution, Sharma believes “there are good yards and bad yards everywhere.”
The International Maritime Organization’s Hong Kong Convention, undergoing the ratification process, aims to improve ship recycling by requiring certification of ship recycling yards, but has not yet come into force.
Sharma noted some better quality yards are taking the further step of being audited by members of the International Association of Classification Societies (IACS) such as Class NK and RINA.
Ocean Transport: Triple play
