The Wall Street Journal reports that about 1,000 ships that have the combined capacity to haul 52 million metric tons of cargo will be dragged onto beaches, cut into pieces and sold for scrap metal this year. This is second only to the record amount of capacity of 61 million so-called dead weight tons that were scrapped and recycled in 2012.
Please consider Economic Slump Sends Big Ships to Scrap Heap.
The global economic slowdown is putting shipping through its most bruising period since the 2008 financial crisis. Companies including Maersk Line, a unit of Danish conglomerate A.P. Møller Maersk A/S, Germany’s Hapag-Lloyd AG and China Cosco Bulk Shipping Co. have 30% more capacity in the water than cargo. As the companies, mostly based in Europe and Asia, fight for bigger shares of the global market, freight rates have dropped so low they barely cover fuel costs.
In the five years through 2015, owners ordered an average of 1,450 ships annually. This year orders through July fell to 293 vessels, or 11.6 million tons, according to U.K. marine data provider Vessels Value.
“Freight rates are dismal,” says Anil Sharma, president and chief executive of U.S.-based Global Marketing Systems, the world’s largest cash buyer of ships for recycling. “So you either idle ships, if you can afford it, or recycle.”
Mr. Sharma said the typical age for recycling a ship is 30 years. This year the average age of ships getting scrapped is about 15 years.
The overcapacity problem has been exacerbated by China’s slowing economy and anemic growth in Europe. Last year, Chinese imports from the European Union fell nearly 14%; Chinese exports to Europe were down 3% in the period. In this year’s first quarter, Chinese imports from the EU fell 7% from a year earlier, a decline matched by exports to Europe.
In the past, recycling a ship has typically generated about one-quarter of the price of a new vessel of the same type and size. But owners say a sharp drop in the price of steel has cut the rate of return to an average of 10% to 15% of the price of a new ship.
Two years ago, in India, Pakistan and Bangladesh were paying about $460 a ton of steel. Last year it was $300 and it is now roughly $250, shipowners say. Officials at the Alang scrapyard—one of the world’s biggest, on India’s West Coast—said prices were likely to stay low through the rest of the year, as China is flooding the market with recycled steel.
Braemar ACM expects about 550 dry-bulk ships to be recycled this year, 29% more than last year and 48% more than in 2014. About 170 container ships are likely to be scrapped this year, compared with 85 last year and 164 in 2014. The scrapping of other ship types, such tankers, car carriers, general cargo ships and fishing boats, bring the year’s total to about 1,000 vessels.
Sold for Scrap
Ships Ordered
Trucking Next
Shipping is peanuts compared to the revolution in trucking that’s on the horizon.
Here are some stats from the Federal Motor Carrier Safety Administration.
- The maximum average work week for truck drivers is 70 hours
- Truck drivers who reach the maximum 70 hours of driving within a week can resume if they rest for 34 consecutive hours, including at least two nights when their body clock demands sleep the most – from 1-5 a.m.
- Truck drivers are requited to take a 30-minute break during the first eight hours of a shift.
- Truckers have an 11-hour daily driving limit and 14-hour work day.
Key Ideas
- The daily driving limit is 11 hours maximum. The average is likely less, lets call it 10.
- Autonomous trucks will not have any limit. With driverless long-haul trucks, capacity will rise by at least 100% and perhaps as much as 140%.
- A massive amount of trucking capacity is on the horizon.
- Truck ship rates will collapse.
- The independent truckers will go out of business, unable to afford retrofit costs and unable to compete with the big trucking companies if they don’t.
The Fed will get a big boost in productivity. Will the Fed like the result?
Mike “Mish” Shedlock
The chart showing ships ordered each year indicates the global economy is past its peak this cycle; otherwise, more ships would have been purchased with the expectation new economic activity would pay for them.
“Mr. Sharma said the typical age for recycling a ship is 30 years. This year the average age of ships getting scrapped is about 15 years.”
Wow, and I thought the shelf life of a computer science degree was shrinking! These ships are getting scrapped out of service with half their useful lifetimes still left in them.
Shelves are empty. All over around here. I think this slow down is on purpose.
I used to work In Highland Park, Mi (aka Harlem Park). We used to gauge the upcoming economic conditions on the amount parked along three idle tracks. How long and how full they got was an accurate indicator. They really got filled up in late 1973 and in 1980.
Boxcars worked then, they should still work now.
Shows the folly of stealing* from potential customers.
*E.g. Government subsidies for private credit creation mean that workers can be disemployed with automation financed with what is, in essence, their own legally stolen purchasing power.
Anything Deflationary, is a big No for the government. So I would say, Nope they will not like this at all.
“In the five years through 2015, owners ordered an average of 1,450 ships annually. This year orders through July fell to 293 vessels, or 11.6 million tons”
1) Is ship buying seasonal? Compare apples to apples please.
“In the past, recycling a ship has typically generated about one-quarter of the price of a new vessel of the same type and size. But owners say a sharp drop in the price of steel has cut the rate of return to an average of 10% to 15% of the price of a new ship.”
2) Ships are steel. Steel FROM ships has fallen. What of steel FOR ships? Given the lower price of raw materials plus the claimed fall in demand, what should happen to the price of new ships? Also the statements aren’t quite clear whether the second half still means “same type and size”.
3) Most important! Two charts show new ship COUNT and scrapped ship volume. What if new ships are larger than scrapped ships? Given both data sets must have been immediately at hand to the author, what is the implication of comparing unlike metrics?
Don’t let your broad outlook screw up your critical thinking Mish.
“What if new ships are larger than scrapped ships?”
Evolution of largest container ship tonnage:
https://people.hofstra.edu/geotrans/eng/ch3en/conc3en/largestcontainerships.html
Conclusion:
Several converging factors underline that further economies of scale in maritime shipping are unlikely to unfold within the foreseeable future, or at least would come at a high cost. The more economies of scale are applied to maritime shipping, the lower the number of ports able to handle such ships which limits commercial options and accessibility. Economies of scale involve higher costs for inland operations as a large quantity of containers arrive at once and must be handled effectively to maintain a level of service. In all the dimensions it involves, economies of scale require capital intensiveness in infrastructure and equipment (ships, portainers, terminal facilities) that is prone to risk. The challenge is no longer about economies of scale, but about finding paying cargo to fill the ships. It is therefore a possibility that the optimal size of a containership would be in the 8,000 to 10,000 TEUs range.
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Also, the need for some cargo ships to transit the Panama Canal limits the size of those ships.
Yes. The average scrapped ship was reported to be 15 years old, so smaller.
The solution to all points of contention is a chart of total capacity vs time with no reference to ship counts, ships scrapped, ship orders, or steel price.
http://www.statista.com/statistics/267603/capacity-of-container-ships-in-the-global-seaborne-trade/
This link shows capacity has increased 20x since 1980 from 11 million dwt to 228 million dwt for container ships. The quickest link I could find only shows containers, not overall.
7.1M scrapped containers vs 228M total represents 3 percent.
Also, Mish’s scrap chart lists estimated total for the year. Mish’s number of ships ordered chart does not estimate total for the year, it stops half way. You see where the comparisons between these charts becomes more misleading the longer you look?
I’m not saying the thesis is wrong. I’m saying the supporting data neither supports nor refutes it.
Panamax ships have access to more ports and less expensive ports than Long Beach. East Coast labor is non union.
No space left on those Indian beaches for volleyball!
Mal-investments galore (and real capital destruction), courtesy of our Central Bankers.
Autonomous trucks are really going to have a major hit on rail/intermodal shipping as well. Makes you wonder why we hear nothing about autonomous freight trains.
Crewless trains don’t achieve significant cost savings per ton of freight moved. You can have a crew of two for millions of tons of freight on rails. That’s a tiny labor cost per ton moved, yet when a brake hose ruptures or a circuit breaker needs to be reset they’re already on site and can keep the millions of tons of freight moving without much delay. When they’re not making running repairs they’re nearly-free onboard safety monitors.
A crewless truck, on the other hand, saves the cost of one human for only 40 tons of freight. Millions vs. 40 is a big difference in tonnage but the cost of one mechanically-delayed truck is acceptable vs. the crew cost savings.
excellent comment!
A sentimental song about shipbreaking:
So it might sound wrong to say that as oil prices move higher trucking does terrific…but as any student of the industry knows trucking’s heydey was in the 70’s when movements in excess of 100,000 pounds were perfectly legal for a dry van. Obviously that’s not true now…but the Fleet can handle loads of that size should Congress just change the law…and so can the interstate highway system. The record for most cargo hauled….not inckudeding the weight of the train…in one MILLION tons by the way. You won’t see that in the USA but 200,000 tons is not uncommon. In other words you are long commodities short transport plays at great peril as the massive profits made by hauling 200,000 tons of Coal to a refinery to make diesel fuel instead of electricity is more than enough to run that train and any big rig for a hundred years.
Profitably.
And that’s just “base load”(meaning plain old commodities.) Once you start talking finished products most of what is consumed in the USA (electronics) can be moved by air…doesn’t get any cheaper than a 767.
At best the Fed will raise twice this year instead of the four times they said they would. Good luck buying into the US market if that starts happening. 100 million is your down payment for anything entry level in the USA right now…one Billion if you’re talking Greater New York City.
The Chinese are the only ones who can come up with that kind of money right now.
I don’t think the Germans can because of Crazy Putin. He’s costing the Continent hundreds of billions in euros in security headaches right now…money Europe doesn’t have right now.
Everything is fine, go back to sleep folks. Obama said this is the best economy in over 100 years, so it has to be true.