23 June 2015

Ship owners are turning to scrap market to cover expenses

Research analyst, Vassilis Logothetis looks at the latest dry bulk market situation and how ship owners are handling it in this week's Intermodal report

For some time now the dry bulk market has been severely affected by China’s slowing GDP growth rate that occurs in the background of increased supply of dry bulk tonnage.

Daily rates for Capes are now well below $10,000 from over $200,000 in 2008 while the BCI index reached its historic low at 311 points during January 2015.

Hence, it comes as no surprise that numerous ship owners consider the demolition market as a possible solution to dispose of old large sized vessels that fail to cover their operating expenses at market’s current levels.

But to conclude a perfect storm the steel market, that is the main driving force behind prices offered by cash buyers and recycling yards for the acquisition of vintage tonnage for demolition, is currently under strong pressure as well. The latter stems from increased exports of cheap Chinese steel that is not absorbed domestically and has flooded the Indian sub-continent. Moreover, prices offered by recycling yards are also negatively affected by the large volume of bulkers that are available to be sold for scrap.

The aforementioned situation has resulted in prices offered nowadays for wet tonnage to range from 210 to 390, depending on the destination, and for dry tonnage from 210 to 370. Just a year ago prices ranged from 310 to 500 for the dry tonnage and 325 to 510 for the wet, a difference of more than 100 dollars per ltd.

Nevertheless, the situation in the dry bulk market for the Capes is so difficult that we have seen a large number of vessels finding their way to recycling yards even at these low price levels.  In May alone, 15 Capes have been sold for scrap while the same number of Capesize vessels went for scrap during the entire first five months of last year. This is something that generally characterizes the market as demo activity across all segments is higher to the one observed last year.

At this point in time and given the situation in the dry bulk market one should expect the increased trend of vintage bulkers heading for demolition to continue up to the point where the freight market reaches a more viable equilibrium regarding supply and demand of tonnage. Bearing in mind the large volume of the dry sector orderbook this will definitely take some time and at the same time it will come as no surprise if current demo price levels slide further. Nonetheless, and despite any additional price softening that could be due, the demo market is expected to continue witnessing healthy activity, as long as the situation in the dry bulk market remains tricky.

Source: Read MT. 03 June 2015

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