There has been a surge in container ship scrapping in the first four months of 2019. Container Shipping & Trade looks at the driving forces
According to data from VesselsValue, 56 container ships were sold for scrap in 2018. Already in the first four months of 2019, 46 vessels have been sold for recycling. Does this mean 2019 has the momentum to overtake 2018 and by how much? It is tempting to annualise January to April figures, and suggest that 138 container ships would be scrapped in the whole of 2019 but the numbers that produces do not seem realistic.
This includes a projection of 66 vessels to be scrapped from the handy container fleet, an event that would have a substantial impact on the size of the fleet. But caution is needed in making such assumptions, as the reasons for recycling are numerous.
A random examination of the individual ships sold for scrapping in 2018 reveals some familiar stories. In the case of 1997-built Feedermax Noble Breeze, the vessel was sold by Rickmers in 2013 and passed Special Survey in 2017, a significant investment in the vessel by the new owner located in the Middle East. The markets failed to recover and in 2018, the value of the vessel had fallen to scrap, according to VesselsValue data, which also records the crew were abandoned by the Middle Eastern owner in 2018 with no diesel to run the generators. The vessel was sold for scrap on an ‘as is’ basis.
A sad case, but for most vessels sold for scrap in 2018, the decision to scrap revolves around age and the date of the next Special Survey. Now that the Ballast Water Management Convention is in force, retrofitting a ballast water management system is added to the equation. This is obligatory, and another potential capital cost is a scrubber to burn high sulphur marine fuel post-2020, if that is the route the owner is taking to conform to IMO 2020. Both are significant investments.
On smaller vessels optimised for TEU capacity, there may not be the space to retrofit even a modular ballast water treatment system, although a deckhouse version is an option. Ballast water treatment system fitment as part of a Special Survey drydock is a 20-day plus event, and of course, the vessel is off hire and not earning revenue.
There is very little data available recording which container ships are fitted with ballast water treatment systems and scrubbers, so this cannot be used as a basis to estimate the number of container ships that may be sold for scrap in 2019. However, the 2018 data reveals the average age of the vessels and the date of the next Special Survey prior to the sale for scrapping.
Using these two factors, a list of potential candidates for scrapping in 2019 has been derived. The total number of 83 is still significantly higher than the 2018 scrappage, but more realistic than the 138 vessels from the annualised projection. For instance, in the handy container sector the annualised projection calls for scrapping 18 vessels, far in excess of the total in 2018. In the Feedermax sector, the analysis based on the average age of previously sold vessels and the date of the next Special Survey reveals a larger group of candidates.
Regarding scrapping, container ship operators and owners need to be aware that the EU regulation on ship recycling became law at the start to 2019. The aim of the European Regulation on Ship Recycling (EU SRR) is to prevent waste being exported from Europe. Vessels flagged in the EU may only be recycled in one of 26 yards on the EU-approved list. Most of the yards are in Europe, with two in Turkey and one in the USA. None are in the traditional shipbreaking countries of the Indian subcontinent and China no longer imports ships for recycling.
So far, it appears that only one vessel has been sold in line with EU SRR, and that was by a Norwegian owner, Greig Star, which sold Star Gran for dismantling at the EU SRR-approved LEYAL Ship Recycling Group yard in Turkey.
Grieg Star chief executive Camilla Grieg said of the decision to recycle the vessel under EU SRR “Star Gran is 33-years-old, and it is time for its last voyage. It has served us well, and it is wistfully we send it to the recycling yard. With Grieg Green’s expertise and the quality of LEYAL Ship Recycling Group, we feel confident in a transparent and high-quality process.”
The reported Star Gran demolition price of US$250/ldt is far below the US$425/ldt that could have been realised through a sale to an Indian subcontinent scrapyard, indicating a sacrifice of US$1.6M to adhere to green recycling principles.
2019 container scrapping is likely to exceed 2018
Should there be the expected surge in container ship scrapping in 2019, it will have the largest impact in the medium size ranges. According to Clarkson Research Services, the container ship orderbook is equivalent to 12% of the current fleet by TEU. That figure is skewed by the growth in orders at either end of the container ship size ranges.
There are 68 vessels of 15,000 TEU or higher on the orderbook, which provide 1.32M TEU (51%) to the total of 2.75M TEU on order. At the other end of the scale, there are 304 Feedermax of 0.55M TEU on order (14% of the orderbook). Between the size ranges of 3,000 to 14,000 TEU there are only 80 vessels of 0.87M TEU on order. The container ship orderbook is a donut with no 6-7,999-TEU vessels on order.
This suggests the fleet will return to some semblance of an equalised supply/demand balance in some sectors. According to Alphaliner, a liner reference database, the 6-7,999-TEU sector is still in demand if somewhat erratically, noting that “modern ‘wide-beam’ tonnage of 6,800 TEU remains unemployed in Asia.” But the “trading environment is generally positive for this segment and charter rates remain on a firming trend.”
There has also been a revival of interest in the classic Panamax, which is much in demand in Asia, according to Alphaliner. It notes that the number of ships of over 4,000 TEU deployed in the Far East regional trades has increased steadily since 2010, from fewer than 30 vessels to 195 units currently. Of these, 153 are classic Panamaxes and the reason for the popularity is the low charter rates on offer.
Operators of feeder services in the Far East, and especially China, can charter in a lower cost, higher capacity classic Panamax to replace smaller vessels, leading to marginal savings in the bunker costs per TEU. This will be a key factor with the introduction of the IMO sulphur cap on marine fuels on 1 January 2020. Low sulphur fuels and alternative compliant fuels are almost certainly going to cost far more and there will be push back from shippers. Carriers will be looking to mitigate this, and chartering in a cheaper, but larger vessel lowers the fuel spend per slot, while absorbing excess classic Panamax supply.