Shipowners Love Ships: Don’t Expect Them to be Scrapped so Quickly

(c) Bloomberg/click for larger
(c) Bloomberg/click for larger

It was reported in Bloomberg’s “Chart of the Day” that the latest rally in iron-ore freight costs since 2009 has prompted shipowners to end the industry’s biggest scrapping program in at least three decades as older vessels earn trading strong rates. Higher freight rates have returned ships to marginally profitable levels, even for older tonnage. However, this is leading to higher net fleet growth through a reduction in scrapping.

Shipowners are conditioned to kill a shipping rate rally and this rally is no exception.

It was also reported in Bloomberg that Chinese investment in rail, buildings and infrastructure will rise 20% in 2013, creating demand for another 135 million tons of steel, Shanghai-based Citic Securities Co. says. As a result, Fearnley Consultants A/S, a research company in Oslo believes that would require 200 million tons of iron ore, used to produce the alloy, enough to fill 180 Capesizes. However, Bloomberg monitors iron ore supply and its data contradicts data produced by Fearnley Consultants A/S.

Bloomberg reports iron ore projects that are “Likely to Happen” will generate an additional 100 million tons in Australia and 34 million tons in Brazil. Worldwide (ex-China) an additional 165 million tons are “likely to Happen” in 2014, a shortfall to the additional iron ore expected by Fearnley Consultants A/S of 36 million tons. Furthermore, the dry bulk market can expect an additional 47 Capesize vessels for the remainder of 2013 and 93 Capesize vessels to be delivered in 2014, with a further 58 Capesize vessels due in 12015. By the end of 2014, 140 additional Capesize vessels are expected to be delivered, enough to cover the additional 134 million tons of iron ore due to be produced in Australia and Brazil. Currently, there are 1,552 Capesize vessels available to move cargo.

In the Bloomberg article, Clarkson Plc stated that World trade in iron ore is expected to grow 6% to 1.17 billion tons in 2013, with China importing two-thirds of the seaborne movements.

With the market currently oversupplied, a lack of scrapping will further pressure dry bulk shipping rates. Any expectation that shipping rates will be stronger and shipowners will stop scrapping. Analysts, shipowners and shipping investors have not planned on the fact that getting rid of an excess supply of ships is so difficult. It’s clear, shipowners love ships.

Jay Goodgal can be reached via email at [email protected]