In these tough times the shipping industry has many advocates of euthanasia. The argument runs as follows: the best way to deal with today's supply problem is to scrap ships over 15 years, especially bulk carriers. Meanwhile big corporates extol the virtues of owning new ships. It sounds good, but is it good economics and, more importantly, is it now happening? The Economics of Ageing Starting with economics, most shippers are not strictly ageist. They pay the going rate for transport per tonne, and prefer modern ships, so older vessels go to the back of the queue, although this is not always a disadvantage. For example the highest rate paid for a VLCC during the 2004 super-boom was for a 1978 single hull. Nobody wanted to charter it, so just before Christmas, it was the only ship left. So going to the back of the queue can be a bonus. Of course old ships have reliability and repair problems, but capable owners cope with these, at least until the 6th special survey. So age economics can work OK, and it's exactly what the market wants: to squeeze as much value as possible out of expensive assets.
Is Scrapping Happening?
Practice seems to support the theory. Scrapping has jumped from 28m dwt in 2010 to 42m dwt in 2011 and is 50% up in 2012. But this year’s 60m dwt trend is only 4% of the 1.5 billion dwt fleet, the normal scrapping level if ships last 25 years. Finally, the age of ships scrapped over the last couple of years is pretty high, averaging 30.3 years in 2011 and 28 years old so far in 2012. In the bulker market, where a lot of the old ships which limped through the boom are now being cleared out, the average age was 28.5 years. But tankers, where scrapping is lower, the average is only 22 years, reflecting the young age of the tanker fleet and possibly the shortcomings of the first generation of double hulls.
It's the Price That Counts
Ultimately price drives the whole process, and today's second-hand prices suggest that the market still has a very healthy respect for the good old ladies. To illustrate this point the chart compares the price of the Panamax bulk carriers sold for second hand trading during May and June (the circles) with the price of Panamaxes sold for scrap. Basically the market value of an old bulker falls from around $12m at 15 years of age to $4m at 23 years of age. The cluster of demolition prices, all vessels in the age range 28 to 30 years, is between $4m and $6m.
They've Got to Go
So there you have it. The call for demolition is all very well, but the shipping market is pretty skilful at squeezing the last few years of useful life out of the old ladies. Of course, the time may come when they have to go, but so far this only seems to be the case for ships above 25 years of age. So if you can’t get credit at the shipyard, maybe you should try your luck with a few golden oldies. After all, if it goes wrong you can always scrap them. Have a nice day.