Scrapping
level and shipping rates
One indicator that
analysts use to formulate supply growth projections is the number of ships
retired. But while scrapping activity does limit supply growth and reduce
rates, it’s best used for short-term assessment.
This is because the rate
at which companies scrap ships often reveals whether the dry bulk shipping
industry is facing excess capacity and depressed rates. When excess capacity pressures profits, firms will often retire older
ships to relieve pressure on shipping rates and maintenance costs.
Companies
scrap fewer vessels
During the first 9 months
of this year, we’ve seen positive momentum in scrapping activity. While scrapping activity stood above 3 million dwt
(deadweight tonnage) per month at the beginning of the year, it has fallen
below 2 million dwt a month. Elevated levels of scrapping activity—such
as the levels seen throughout the first half of 2011, the end of 2008 to early
2009, and most of 2012—have historically coincided with falling shipping rates.
Lower
scrappage is positive
Companies and analysts
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.
New ship
deliveries falling
At the same time that
scrapping activity is falling, new ship deliveries have also fallen.
Approximately just under 4 million dwt of vessels entered the industry in
August and September. While still elevated compared to pre-2009 levels, this is
an improvement. Lower scrapping activity and lower
new ship deliveries are both 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.
Source: market
realist.
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