A Painful Shipping Record – Vessel Scrapping

 

Now is not a good time to own an old containership. Drewry’s Container Forecaster (June 2016) found that, for the first time, 450,000teu of containership capacity is expected to be scrapped in just one year, as the containership sector recognises that there are far too many ships chasing too little cargo.

 

Based on an average size of 3,000teu for ships which are being scrapped, this means that about 150 mainly old and medium-sized containerships will be pulled out of the market or out of temporary idle positions and sent to the scrapyard in 2016.

 

In 2015, demolitions were less than half this level. The surge in demolitions started in 4Q 2015, has continued since and looks set to reach 450,000teu by the end of 2016, an even higher annual total than the 444,000 teu scrapped in 2013. (For disclosure, Drewry consultants have advised some owners and investors to scrap their containerships in recent years, but we have no ownership links with shipowners and have an independent view).

 

In the first three months of 2016 alone, some 14 Panamax ships were scrapped and many of these are German owned and previously leased out on the charter market. These owners have felt the force of the charter rate downturn more than most others.

 

Younger vessels are being scrapped. These included recently the 6,479teu DS Kingdom (15 years old), owned by DS Schiffahrts. Two other young ships of 6,350 teu (built 2002) – MOL Precision and MOL Promise – were also scrapped.

 

Containerships are normally depreciated over 25 years, so scrapping a 15-year-old vessel implies a write-off of nearly 40% (the owner also gets some cash for the steel from the demolition yard to offset part of the loss).

 

Furthermore, the opening of the new Panama Canal in June has created a surplus of old “Panamax” ships of around 4,500 teu. This size and design of ship – previously one of the workhorses of the containership industry – has essentially been made redundant. More Panamax vessels will surely head for the scrapyards of South Asia, as their owners or charterers replace them by newer and more efficient 8,000teu+ ships.

 

Removing 450,000teu of capacity this year, however, accounts for just 2% of the current 20-million-teu-strong global fleet of containerships. This will only make a dent into the over-capacity built during the 2010-15 period, which saw 4.5 million teu in capacity added to the industry globally at a time of slowing demand.

 

For charter owners with older containerships on their books, the choice is between chartering out ships at historically low (and loss-making) levels, or paying for idling costs until a hoped-for shipping market recovery happens, or scrapping the vessels. More will decide that scrapping is the least bad of the three options. Expect ship scrapyards to be busy for the remainder of the year.

 

 The opening of the new Panama Canal, a widening gap between ocean transport supply and demand and the fear of continuing losses among charter owners are three compelling factors behind the current surge in boxship demolitions. Although necessary, ship demolitions will not be enough to bring the container sector back into balance unless owners also refrain from ordering many new vessels.