The recent plunge of the dry bulk market freight rates has once again prompted ship owners to speed up the rate of demolition of older ships. But, according to an analysis from BIMCO, during the first two months of 2012, dry bulk vessels that leave the fleet for recycling are getting older and older.Merchant vessels today are recycled four years older as compared to 10 years ago. Chief shipping analyst at BIMCO, Peter Sand, says: “the commercial realities in the dry bulk freight markets spur ship owners to recycle ships that are no longer economically viable. When doing so the ship owner considers his total fleet-mix, seeking to find the optimal balance between older, but still viable, fully depreciated tonnage and recent deliveries entering into the fleet as part of a renewal process. Then, the poorest performing vessels get recycled”.
In total, BIMCO forecasts 20 million DWT of dry bulk to be recycled during 2012, as rates are expected to rise from the current very low levels. However, should the earnings of January and February become the norm for the year, recycling will be higher than the current forecast. But how much higher it potentially can go is something that BIMCO currently looks into for a publication soon to be forthcoming. Preliminary results point to a rather limited potential for the dry bulk fleet.
Recycling activity in 2012
In its report, BIMCO said that “the 1987-built Panamax bulk carrier M.V. Vassilios II became the last dry bulk vessel to meet the blowtorch in February. Before that happened, a total of 4.1 million DWT had been recycled during the first two months of 2012. This is up from 3 million DWT in 2011 during the same period of time. Following the tonnage-gets-older trend from recent years, the average vessel that left the fleet via a breaker yard was built in 1983 with an average size of 55,400 DWT. However, it is noticeable that the three youngest vessels, breaking the trend, were all from the Capesize segment. In total five Capesize vessel with an average age of just 22.8 years left the fleet during the first two months of 2012. This compares to eight Capesizes with an average age of 28.5 years being recycled during the same period of time in 2011. “The correlation between poor earnings and the volume of recycled tonnage is very strong, and intuitively it makes sense. Fortunately, current scrap prices offered in the market remains solidly around USD 460 per LDT. At that price level a Panamax bulker can bring back USD 5.5 million of cash to her owner in addition to removing the concerns over difficult future employment perspectives” adds Peter Sand.
One reason for leaving an older vessel in the fleet-mix at the expense of a younger one is low running costs. A fully depreciated vessel may be preferred due to lower daily cash costs over a younger, but indebted, vessel carrying extra costs in terms of interest and repayments. Moreover, an increasing scrapping age also tells us that there are a lot of older vessels still in service. There is, however, a natural upper limit as to how high the scrapping age might get, specifically amongst the large Capesize bulk carriers which primarily carry heavy bulk cargoes and coal. Coal may be relatively harmless, but i.e. iron ore is a different tough cargo to carry for the vessels, which in turn could limit the lifetime of a Capesize bulk carrier. As iron ore is an oxidising cargo, galvanic corrosion might take place in the cargo holds. This adds to the wear and tear on the hull structure. Moreover, high loading rates could challenge the operation of the carrier, its ballast water system and overall hull and structural strength.
Meanwhile, in the latest weekly demolition reports, Clarkson Hellas said that “with the fast approaching budget announcement set for next week, cash buyers contemplating on offering for tonnage for India are becoming rather sceptical and preferring to concentrate on their tonnage already in hand and sell off existing units before making new acquisitions.
The appetite has cooled somewhat from the buyers and the general feeling is that we may witness a quiet week ahead until the budget decisions are known. Obviously, many rumours circulate ‘pre-budget’ and until the announcement is actually made, we do not know any specific details however locally, many predicting that the budget will not be favourable to the industry with an increase in taxes – if that happens, we shall definitely see a correction downwards in rates, however this is pure speculation and we await next Friday with abated breath.
As evidenced in the sales collated below, Pakistani breakers continue to be the most aggressive for any larger tanker units available with numbers still touching the USD 500/ldt level. With easier gas freeing requirements too, any larger tanker unit will most likely find the yards of Karachi/Gadani as their final destination. Chinese buyers are still showing their competitive streak and continue to offer numbers that give Owners who have tonnage finishing in the Far East a viable alternative to their counterparts in the Indian sub-Continent” concluded Clarkson Hellas.
In a separate report, shipbroker Golden Destiny mentioned that “in the demolition market, the flurry of vessels available for scrapping in Alang has made difficult for owners to find end buyers with scrap prices still being at moderate levels, below $500/ldt for dry and near to $500/ldt for wet units. Pakistan, which is usually competitive for tankers, seems to be out of the game with limited tanker disposals, while in China prices are still holding around $410-$430/ldt with some light activity being reported for dry units. In Bangladesh, the status remains stressed with recent advice for owners to keep distances from Chittagong with end buyers positioning away from the market due to constant delays, endless paperwork and lack of finance from the local market.
The week ended with 17 vessels reported to have been headed to the scrap yards of total deadweight 660,376 tons. In terms of the reported number of transactions, the demolition activity has been marked with a 19% week-on-week decline, whereas there has seen a 49% decline regarding the total deadweight sent for scrap, due to lower scrapping removals, 38% and 17% for dry bulkers and liners respectively. In terms of scrap prices, the highest scrap rate has been achieved this week in the tanker segment by India for a small unit of 9,312 dwt with 3,402 ldt built 1985 at $700/ldt including 291tons stainless steel and 189 tons solid. Bulk carriers and liners have grasped the lion share of this week’s total demotion activity, 59%, with India winning 11 out of the 17 total demolition transactions with China and Bangladesh winning only two vessels each. At a similar week in 2011, demolition activity was standing at similar levels, in terms of the reported number of transactions, 17 vessels had been reported for scrap of total deadweight 959,925 tons with bulk carriers and tankers grasping 59% of the total number of vessels sent for disposal. Scrap prices were floating at current levels. Bangladesh and India had been offering $465-$500/ldt for dry and $490-$525/ldt for wet cargo” concluded Golden Destiny.