Braemar Asks: Is Another Demolition Spike Due?

As the Baltic Dry Index plumbs all-time depths, those with long memories are recalling the dark days of the 1980s for the shipping markets.  However, steel traders can look forward to a bumper year of supply of vessels for recycling this year, if previous experience offers a guide for the 2012 outlook. Bets are now being taken about how many vessels will be forced by the weak freight markets into the arms of recyclers.

 

Globally, ship scrapping capacity has very big limits being a simple business of driving ships onto beaches and cutting them up with oxyacetylene torches. Theoretically, great numbers of ships could be sold for scrap and held as inventory by the scrap dealers, to be pushed up the beach as and when required. Scrap prices for ships of around USD $500 per light displacement tonne (LDT) remain, suggesting that demand for the steel content in ships remains strong.

 

Meanwhile, ship recycling capacity could grow further in coming years. The China State Shipbuilding Corporation President said recently that half of China's shipyards could go bust in the next two to three years. Many of these yards could switch to recycling as, theoretically, could European shipyards, though the economics of recycling in Europe are currently not encouraging.

 

Braemar Seascope estimates that,  in 2011, 24.2m dwt of bulk carriers were sold for scrap, surpassing the 12.0m dwt scrapped in 2009 during the credit crunch, and the 11.5m dwt scrapped in 1998 after the Asian financial crisis, as well as the 15.0m dwt scrapped in 1986, the year the BIFFEX bottomed out at 554 points on 31 July.  2011 was not a record-breaking year for tanker recycling despite the poor freight markets.  For four years from 1982 to 1985 over 20m dwt of tankers were recycled while 14m dwt was sold for demolition in 2010. Last year saw 8.4m dwt of tankers recycled, with the figure for January 2012 maintaining the trend.

 

Scrapping of all types reached 41m dwt in 2011, making it the third biggest year for demolition ever. The second biggest 1986 when 43m dwt was scrapped, and the biggest ever was 1985 with 44m dwt sent to the beaches. Mark Williams, Braemar Seascope research director in London, said: “If macro-economic conditions in 2012 continue to underwhelm and if scrap prices stay at their recent high levels, this year could easily surpass 1985 as a peak year for demolition.”