06-03-2017

Shipping’s blues: The many barriers to scrapping cargo ships

ships

Too many new ships, too few old ones scrapped. Since the financial crisis, after which trade growth slowed, the Baltic Dry Index—a measure of bulk freight rates—has fallen by 93%. Prices for transporting containers have plunged by the same amount on some routes. In 2008 it cost $2,000 to send a 20-foot box from China to Brazil; now it costs $50. The industry is drowning in red ink. Hanjin Shipping of South Korea, the world’s seventh-largest line, went bust last August, and even Maersk Line, which has the lowest costs in the industry, lost $367m in 2016.

But there was some optimism this week at European Shipping Week in Brussels, an industry event. Bosses at bigger lines reckon the worst is over. Higher levels of scrapping will cut overcapacity, argues Rolf Habben Jansen, CEO of Hapag-Lloyd, a German line. The industry may break even this year, predicts Rahul Kapoor of Drewry, a consultancy.

But many shipowners are still too reluctant to send their hulks to the scrapheap. The problem can be clearly seen in the container-shipping business. Last year firms scrapped 194 ships, accounting for 3% of global tonnage—a record high. But new ships will add 8% more capacity this year; the net increase is over twice the level of forecast growth in demand.

The surge in shipbuilding was originally prompted by Maersk Line’s order in 2011 for 20 huge Triple-E class vessels. These ships cut Maersk’s costs relative to its rivals, which retaliated with their own orders for supersize ships. At first the industry was able to mask the extra capacity by reducing sailing speeds by a third, but that ruse has reached its limit.

Executives at bigger lines hope that their own new fuel-efficient liners will push small, independent shipowners to scrap older ones. Yet these are often family businesses and have no such intention, says Basil Karatzas, an adviser to many such firms, not least because the scrap value of their ships is much less than the cost of new ones. For that, blame over-production of steel by China. The scrap value per long ton of ship fell from $450 in 2014 to $271 last year. Banks have preferred to restructure loans on unprofitable vessels rather than scrap them at a fraction of the value of the debt owed on them.

Breaking firms are becoming more cautious, too—particularly the beaching yards in India, Pakistan and Bangladesh that account for two-thirds of ship-scrapping globally. Last year several in India got into trouble when they bought vessels during a short-lived steel-price spike and then had to sell the scrap at a big loss.

Some yard owners also complain about the cost of compliance with the Hong Kong International Convention of 2009, which sets minimum environmental and worker standards for ship recycling. Although India, Pakistan and Bangladesh have not ratified it, some facilities, such as India’s Shree Ram yard in Alang, try to adhere to the convention. Others do not. Falls this year in the number of bulk carriers and tankers being sent for scrap may be bad news for the shipping industry. For the environment, there is a silver lining.

Source: Economist

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