A key question in any discussion of today’s shipping surplus is “won’t scrapping solve the problem?”. Eco-ships will make all the over-age tonnage obsolete and the problem’s solved. Unfortunately this solution, which is promoted in most shipping cycles, relies on a good deal of wishful thinking. It turns out that life isn’t always that easy, so once again it is helpful to turn our attention to demolition.
Not Over-Aged, Over-Simplified
The first problem is the meaning of “over-age”. It suggests a line in the age profile of the fleet at which ships are demolished, making way for younger and better vessels. This approach was used in the 1980s to predict scrapping of VLCCs built in the 1970s boom. These ships, it was argued, had a 20 year life and the model predicted heavy scrapping in the mid-1990s. But things developed very differently. Some were scrapped, but many 1970s VLCCs sailed on to the ripe old age of 30 years and made good money!
In practice ships only get scrapped when investors believe they can never make a profit. The limited capital tied up in an old ship is underwritten by its scrap value, and trading in the hope something will turn up does not cost much. The problem is the repair cost. By 30 years old the bills are bigger and the future limited, so even well maintained ships bow out at the 6th special survey, while their neglected contemporaries disappear at the 4th or 5th.
To see how “phased scrapping” has worked recently we compared tonnage demolished since 2009 against the tanker and bulker fleet age profiles at start 2009. The tanker fleet seemingly phased out quite rapidly. By start October 2014, 60-85% of the fleet built in 1992 or earlier had been scrapped, with 59.7m dwt removed from capacity built 1996 or earlier over the period. The bulkers show a slightly different pattern. 83% of the vessels built in 1984 or earlier have been scrapped, but from then on the figure drops to 20-40% for 1992-93 built ships, with 107.0m dwt of capacity built 1996 or earlier removed. Tankers have generally had a lower life expectancy than bulkers.
One way to look ahead (and there are many) is to use this phase-out model to project demolition levels. After 5 years of demolition and tanker phase-out, the fleet of ships built 20 to 30 years ago is much diminished. If the phase out rates for the last five years are applied to today’s fleet built 2001 or earlier for the next 5 year period, about 60m dwt of tankers would be demolished (12m dwt a year). 90m dwt of bulkers would also be gone (21m dwt a year). That’s 30m dwt of removals a year, not too far from the recent trend.
Predicting demolition by phasing out ships at a particular age is OK, but in practice some ships age better than others. Then there are ships which leave the fleet through conversion to offshore or another activity. But behaviour patterns can change. If dry cargo charterers became as demanding as their counterparts in the tanker business, the “age gap” between tankers and bulkers might close and bulker demolition could be very different. Have a nice day.