While shipping scrappage activity
does affect supply, it’s best suited to get an immediate to medium-term
assessment of supply and demand dynamics (depending on how you slice and dice
it). The rate at which companies scrap ships often reveals whether the dry bulk
shipping industry is facing excess capacity. When excess capacity pressures the
shipping industry, firms will often retire older ships to relieve pressure on
shipping rates and maintenance costs.
Scrapping activity rises, but
remains in downtrend
On October 18, the total number
of ships retired since IHS Global Limited began collecting the data in 2005
rose 7 vessels from a week ago, reaching 2,709 vessels. On an eight-week moving
average basis, used to show a clearer trend, the number of vessels scrapped
rose from 7.74 to 7.75 the recent uplift that we’ve seen.
As we mentioned in previous
updates, the late increase in scrappage could reflect some near-term weakness
in the dry bulk sector. However, companies have been scrapping fewer and fewer
vessels since June 2012, which is a medium- to long-term positive. As new ship
deliveries are coming down after years of significant supply additions, there
should be less of an incentive for managers to scrap vessels. We should see
scrapping activity fall to levels seen during 2009 and 2010 in late 2014 or
2015.
Falling scrappage is actually
positive, not negative
Companies often report the number
of ships available to scrap as evidence of limited supply concerns, but the
reality is that several ships do celebrate birthdays beyond 25. Managers are
also unlikely to scrap ships just because they’re old and will often try to
hold on to old vessels as long as they can find customers to use them.
So although the industry can
scrap another 200 ships, investors should see falling scrappage as a positive
sign that shipping rates are rising. Besides, when shipping rates do recover,
second-hand vessels actually increase in value way more than new-build
prices—another key indicator.
Why the current trend is positive
for dry bulk shipping companies
As long as scrappage activity
continues to fall over the medium-term trend, it’s a positive indication that
fleet utilization (supply and demand dynamics) is tightening, which is positive
for shipping rates and stocks like DryShips Inc. (DRYS), Diana Shipping Inc.
(DSX), Safe Bulkers Inc. (SB), and Navios Maritime Holdings Inc. (NM). The
Guggenheim Shipping ETF (SEA) will also benefit. In the near-term, we could see
some weakness in share prices if scrapping activity continues to rise.
Source:
shipping tribune. 28 October 2013
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