Scrap markets at work

Republished by kind permission of: A&A Thorpe, 131a Furtherwick Canvey Island, Essex SS8 7AT Tel: +44 (0) 1268 511300 Fax: +44 (0) 1268 510467 shipaat@aol.com

Shipping markets are an economist’s dream. More than most others, they reflect the fundamental laws of economics functioning very effectively. Demand outstrips supply – prices rise; but any whiff of oversupply, and quite the reverse. Usually, it’s the tanker market that is cited as perhaps the best market sector to demonstrate the fundamental economic law of supply and demand. 
   

But recently, it’s the dry bulk sector that students of maritime economics may be analysing. Capesize bulk carriers that weren’t for sale, at almost any price, eight months ago are now on the market for a pittance. Smaller old bulkers are heading for demolition in droves and the world’s scrapyards are full to bursting. And what about all the schemes, some of them mostly funded, to convert VLCCs and Suezmax tankers into bulkers ... what’s happened to them?  Everybody’s staying schtumm, particularly the banks that were planning to fund them. 
   

But it’s not just bulkers – older vessels across the board, kept trading by record rates, are no longer wanted – general cargoes, car carriers, old feeders and, of course, single-hull tankers due to be phased out anyway. Thousands of ships that have traded beyond their time are now a costly drain on their owners – last in the queue for what work is available, and expensive to operate in any event. Supply outstrips demand across the board.
   

In times of plenty, it is easy to draft worthy aims designed to improve the status quo. Ship breakers were ambivalent when shipping’s regulators decided that demolition procedures needed hoiking into  the 20th century, and now the 21st. Green ships and careful “recycling” was all very well as a discussion point when there were few scrap candidates to be had. Now, though, the reality is very different. 
   

For years, the IMO has been working to raise demolition standards through its Ship Recycling Convention, which is due to be adopted in May but will probably not be ratified for many years to come. The Convention’s aims are laudable – hazardous materials in ships’ structures should be properly listed and handled; and demolition procedures designed to ensure personnel safety and minimal environmental impact should be adopted by owners as well as scrap yards.
   

However, demand and supply in the scrap market during the early weeks of this year has once again demonstrated that economic laws aren’t just theory – they prevail in real life too. And pragmatic brokers concede the case: owners opting to scrap old tonnage want the best deal at the best price – they are in a commercial business, after all.
   

Of course, there are a few publicly listed shipping companies, some controlling large fleets, which aim to demonstrate to shareholders that they are ahead of the game. But mostly, such companies control relatively modern fleets which are, at least for the moment, not obvious scrap candidates anyway. In overall terms, however, the volume of tonnage owned by such companies is relatively small. And certainly in the dry bulk market, the vast majority of ships are owned by private companies hell-bent on the best deal they can get. 
   

At a recent seminar in London, there was some pretty candid talk. Owners could choose to run deals by the book, but would risk a much lower return if scrap buyers were forced to do the same. Market sources differ on the quantum but one of the seminar speakers, Headway’s Harry Malandreniotis, said scrap prices could vary by as much as a third, depending on the level of due diligence and documentation. 
   

Scrap yards have an assured market for many months to come and breaking as many ships as quickly and cheaply as possible is a key priority. Can they be expected to adopt new procedures, still not adopted and drawn up on a “nice to have” basis, with little scope of having broad impact in the demolition industry for many years to come? It looks as though the IMO Convention has a long way to run.