Shipping lines are opting to keep running older container ships despite a global glut, as plunging metal prices reduce the incentive to scrap them.
Fewer container ships are headed for the scrap heap, despite a global glut that’s sent rates spiraling lower along major global trade routes.
Scrapping of container ships is down by more than half from last year and is on pace to end the year at a four-year low, according to a new report by Drewry Shipping Consultants Ltd.
Ship owners scrapped just 47 vessels in the first half of 2015, removing from the market about 87,500 twenty-foot equivalent units, a common measure of shipping container capacity. That compared with 107 vessels at the same point last year. In 2013, shipowners removed 444,000 TEUs from operation, and in 2014 381,000.
The reason for the slowdown is the falling price of scrap metal. Prices paid to ship owners to demolish vessels in South Asia were down 12% in the first half of 2015, compared to 2014, to $390 per ton for an empty ship. Prices were down over 20% in China to $236 per ton, according to Drewry. The two regions break down the vast majority of ships.
Low metal prices mean shipping lines often find it more profitable to continue using older and smaller vessels rather than scrapping them. Drewry has counted 35 new inter-Asia regional shipping services added this year, which typically use smaller ships than the larger, trans-Pacific, Asia-to-Europe, and trans-Atlantic shipping routes. Simon Heaney, the researcher who authored the Drewry report, said there are about 750,000 TEUs worth of shipping capacity in ships that are older than 20 years, and therefore candidates for scrapping.
“The number of ships is there, but at present, the balance between what they can get from operating versus what they can get for scrapping is tilting towards operating side,” Mr. Heaney said.
By contrast, owners of dry-bulk freighters, which often ship commodities like iron ore and coal, are sending more ships to be demolished, a response to the collapse in freight rates that has resulted from China’s waning appetite for commodity imports.
But even if scrapping picks up, it will not solve the container industry’s overcapacity problem, Drewry said, because most of the ships that get scrapped are older than 20 years and have an average capacity of 2,000 TEUs. Most of the overcapacity issues, by contrast, are on high-volume trade routes that use newly-built ships that can each carry more than 10,000 TEUs.
“In reality scrapping does not do anything to minimize overcapacity in the high-volume trades that have the biggest say on the leading carriers’ profitability,” Mr. Heaney wrote.
In July, Drewry reported that weak spot freight rates, which fell 32% on the four main East-West trade routes in the second quarter from a year earlier would make it hard for many leading carriers to be profitable in 2015.
Source: The Wall Street journal. 28 September 2015