Scrapping has little impact on over-supplied trade routes, Drewry finds

Greg Knowler, Senior Asia Editor | Sep 29, 2015 1:09AM EDT

HONG KONG — If all the ships over 20 years old were demolished tomorrow, the global fleet would shrink by around 750,000 TEUs, or 4 percent of the total, yet ship utilisation on the embattled Asia-Europe services would not budge one percentage point.

Drewry made this surprising point in its Container Insight Weekly newsletter to illustrate the importance of analysing capacity and the scrapping of tonnage on a trade-by-trade basis.

“The lack of scrapping activity could be viewed as a missed opportunity to redress the supply and demand imbalance, but in reality scrapping does not do anything to minimise overcapacity in the high-volume trades that have the biggest say on the leading carriers’ profitability,” the analyst said.

Measuring the impact of scrapping on the global fleet was meaningless since it was crucial to look at deployment of assets at the individual trade route level. Drewry said by only scrapping vessels of less than 6,000 TEUs that are deployed mainly in North-South and intra-regional trades, nothing was done to alleviate the pressure on East-West routes, where virtually all of the newbuild capacity is being placed.

“Scrapping can widen the cascading opportunities for smaller East-West ships into North-South trades, but beyond that it does very little,” the weekly insight found.

Drewry noted that the number of containerships that were scrapped by the half-way stage of 2015 decreased dramatically, with only 47 vessels demolished compared to 107 at the same stage in 2014. That scrapping slowdown removed just 87,500 TEUs from the world’s cellular fleet that was fast approaching the 20 million TEU mark with the steady influx of big new ships.

By the end of this year, Drewry expects the scrapping total to be the lowest since 2011, representing just a tenth of the newbuildings that have been added to the fleet. Owners of older ships have preferred this year to extend the lifecycle of their assets rather than consign them to the scrap heap because demolition prices are less attractive than they were, and because of renewed demand for panamax ships.

Drewry said the average size and age of vessels being demolished had not changed much in the last few years and was  currently around 2,000 TEUs and 23 years. The analyst added that at the moment, it seemed unlikely that owners would start scrapping a large number of ships younger than 20 years old.

There are only about 40 ships above 4,000 TEU that are currently older than 20 years, meaning that most of the immediate scrapping candidates would as before come from the sub-2,000 TEU sector. However, Drewry said this would change in the next three to four years, with many more Panamaxes becoming theoretical candidates for scrapping, especially with the widened Panama Canal that would make trade route deployment more difficult.

Drewry’s conclusion was that while it expected scrapping to pick up a next year, unless owners took got rid of younger and bigger ships, scrapping was not the answer to the industry’s overcapacity problem.