In recessions shipping sentiment can sometimes have a slightly schizophrenic feel. The more demolition mantra crops up again and again at conferences, which is fair enough. But it makes a strange bedfellow for the buy low sell high brigade who are desperately searching for cheap ships. Ultimately these philosophies collide at the bottom of the market where demolition decisions are made.
The System's Not Broken
Today the bargain hunters get lots of attention, but how is demolition getting along? Well, the cash buyers have never been busier. Tanker and bulker demolition hit a new record of 45m dwt last year (see graph) as the market got into its stride, acting as the "pressure valve" which adjusts the balance of supply and demand.
Demolishing the Downturn
The graph shows how responsive demolition is to market pressures. There was a cycle in the 1980s when it peaked at 35m dwt in 1985 then, as earnings recovered, fell to 4m dwt in 1988. In the 1990s the market was more subdued and there was less volatility. Scrapping fluctuated around the long-term average 15m dwt, buoyed by single hull tanker demolition, with 40m dwt scrapped in the 1992-5 tanker recession.
Then in the 2000s came another megacycle. Between 2000 and 2004, the 30th anniversary of the 1970s tanker building bubble, another 74m dwt of single hull tankers went. But as the market moved into the 2003-08 boom, bulk demolition slumped to only 4m dwt scrapped in 2007. This was followed by a surge as the market moved into recession and demolition jumped to 19m dwt in 2009, 33m dwt in 2011 and 45m dwt in 2012.
Textbook Track Record
That's the history. But suppose the market turns nasty for the next few years, how much demolition could there be? A rough answer is provided by the demolition scenario for the years 2013 to 2015 shown in the chart. It assumes that in 2013 tankers and bulkers aged 23 to 28 years are scrapped; followed by ships aged 21 to 23 years in 2014 and the 20 to 21 years age group in 2015.
That clears the market of everything over 20 years of age, except for 20m dwt of small, old pre-1984 ships which were not included in the analysis. This year the average scrap age is 23 years for tankers and 27 years for bulkers, so this scenario, which continues last year's high scrapping for another 3 years, is pretty negative.
The Demolition Difference
So there you have it. A clear out like this would leave a big hole in the fleet. The bulk orderbook is 177m dwt and demolition scenario would remove 140m dwt, neutralising 80% of the deliveries, less a margin for the lower efficiency of scrap ships. Will it happen? Don’t count on it. Scrapping is just a safety valve. Physically tankers and bulkers can easily trade to 30 years, so the minute there is a whiff of recovery, trading buyers will be in there snapping up the cheap ships. In short, the show isn't over till it's over.