“When the going gets tough, the tough get going” – at least that’s what Billy Ocean’s number one hit told us in 1986. Well, there’s no escaping that the dry bulk markets are in a tough place at the moment. Owners have responded by selling more, and younger, vessels for demolition, but just how tough have they been so far, and how tough might they get?
…The Tough Get Going
The first 3 months of 2016 are shaping up to be the biggest quarter on record for bulkcarrier demolition. In the first 9 weeks of the year, 120 bulkcarriers of 10.1m dwt have been reported sold, a pace that, if continued, will see the current record of 10.9m dwt set in Q2 2015 surpassed. Such high levels of demolition clearly reflect the depressed state of the bulkcarrier market in 2016 so far. This week’s graph highlights previous occasions when low freight rates have led bulkcarrier owners to get tough with older vessels.
When The Going Gets Rough…
The first period of sustained high demolition was in the mid-1980s, with activity peaking at 12.3m dwt in 1986 – equivalent to 6.2% of the total start-year fleet. In the same year average scrapping ages plummeted to 18.8 years – that was tough! The second major phase of demolition occurred through the second half of the 1990s and into the first half of the 2000s. Peak demolition levels were similar to those seen in the mid-1980s, with 12.3m dwt leaving the fleet in 1998. But fleet growth in the intervening period meant that this accounted for just 4.6% of the fleet at the start of the year. Average scrapping ages dipped slightly, but remained above 25 years.
So how tough are things now? In terms of tonnage leaving the fleet, the current phase is by far the most extensive. 2012 was the biggest year on record for bulker demolition with 33.4m dwt heading to the breakers. However, rapid fleet expansion over the past decade means that this accounted for 5.4% of the start-year fleet, slightly below the level seen when Billy Ocean was having hit records 30 years ago. The first half of 2015 and the start of 2016 have been very active periods, but these high volumes will need to be maintained in order for the annual demolition-to-fleet ratio highlighted in the graph to return to the levels of the mid-1980s.
…The Tough Get Rough
How much tougher can owners get? The average scrapping age for bulkcarriers has fallen from 33 years in 2007 to 24 years so far this year, and market conditions are such that vessels built in the 2000s are now candidates for recycling (a total of 10 such Capesizes and Panamaxes have been sold since the start of last year). So it’s clear that owners are getting tougher, even if there might still be some way to go.
There are still 57.8 dwt of bulkcarriers in the fleet aged 20 years or over, including 108 Capesizes and 166 Panamaxes. So despite a predominantly young age profile (see SIW 1209), there are plenty of potential demolition candidates in the fleet. The dry bulk market has bounced back from tough times in the past. For those prepared to “tough it out”, further demolition could help the market return to better times. Have a nice day!