lthough tanker scrapping revived in the past twelve months, recycling activity within the world merchant ship fleet has been generally subdued in recent years. But signs point to much larger future volumes of vessels being consigned to shipbreakers’ yards.
Shipowners have been reluctant to send old or uneconomical vessels to the breakers’ yards in the past few years. During the 2019 to 2021 period annual recycling totals in the world fleet of merchant ships were the lowest since an exceptional freight market boom, with associated low scrapping, ended almost fourteen years ago in 2008. Since then the world fleet’s capacity has grown by over four-fifths, emphasising how scrapping has proportionately receded.
Notable large annual recycling totals for tankers, bulk carriers and container ships were seen in individual recent years, usually preceded or followed by low annual volumes. In the past five years merchant ships scrapped averaged just over 1 percent of the fleet’s beginning-of-year deadweight tonnage. In the previous five years closer to 3 percent was scrapped annually.
What will happen in the period ahead? Forecasts of demolition sales even in the short-term future of up to twelve months ahead frequently prove erroneous, because it is often not predictable how freight market patterns and changes in sentiment and expectations will affect owners’ scrapping decisions. For the longer-term future most estimates are based on guesses, albeit informed by historical observation. Nevertheless, signs now suggest that tightening regulations in the next few years may encourage much more demolition from 2022 onwards.
In the three years from 2019 to 2021 annual scrapping volumes – bulk carriers, tankers, container ships, gas carriers and other ship types – averaged 22.2 million deadweight tonnes. Following the 17.6m dwt low point in 2019, volumes increased to 24.7m dwt in 2020 and 24.2m dwt last year based on Clarksons Research data. These totals are well below a 31-59m dwt annual range recorded in the previous seven years of the decade ending 2021, averaging 41.6m dwt.
After the shipping market collapse caused by the world financial crisis and accompanying global recession in 2008-2009, merchant ship recycling rose to record high levels including 44m dwt in 2011, a peak 59m dwt in 2012, and 48m dwt in 2013, resulting in a three-years total of over 150m dwt. Since then only one year, 2016, saw a total approaching these levels at 45m dwt. Other years up to 2021 were characterised by much lower annual volumes.
Comparing the latest five years with the previous five years provides a perspective on the receding pace of demolition sales as a proportion of the existing fleet. During the period from 2012 to 2016, annual scrapping of merchant ships was equivalent to an average 2.7 percent of the world fleet. In the five years from 2017 to 2021, this proportion fell by half, with tonnage equivalent to an average 1.3 percent of the fleet being scrapped annually. These figures emphasise that a minimal part of the fleet’s capacity has been scrapped in recent years.
Reduced bulk carrier scrapping contributed a large part of the overall decline. In the past five years, demolition sales of bulk carriers totalled 47.4m dwt, 64% lower compared with 133.0m dwt in the previous five years. By contrast tanker scrapping saw the opposite pattern, rising by 52% to 54.5m dwt, from 35.9m dwt. In the container ship segment reduced scrapping was recorded, with the volume falling by 57% to 12.1mdwt in the past five years, from 28.4m dwt in the previous five years. Among all other ship types together lower scrapping persisted in recent years.
The trend towards limited scrapping may seem inconsistent with the surplus world merchant ship fleet capacity which has been a prominent feature over a large part of the past decade. This surplus varied in intensity among segments, and from year to year. For much of the period subdued freight markets prevailed, interspersed with occasional upturns. But these stronger periods and signs of continuing global seaborne trade growth periodically renewed market optimism for an eventual fundamental improvement in the vessel demand/supply balance and freight rates. Despite substantial uncertainties about prospects, the positive pointers bolstered owners’ confidence, restraining sales for demolition.
Recent scrapping patterns
Demolition sales in the world merchant ship fleet as a whole remained fairly stable in 2021, decreasing by 2 percent to 24.2m dwt, according to Clarksons Research provisional calculations which may be revised significantly. This volume was equivalent to just over one percent of fleet capacity measured at the beginning of the year. But as the above graph shows, contrasting changes among the main segments were seen.
Tanker scrapping soared last year, compared with the previous twelve months, while bulk carrier scrapping plummeted and container ship scrapping almost disappeared. Recycling of gas carriers and other vessel types was broadly unchanged. The tanker segment in 2021 recorded the highest total for three years at 15.6m dwt, rising more than four-fold from 3.8m dwt in the previous year. Bulk carrier scrapping was down by two-thirds to 5.1m dwt, while only a minimal 0.2m dwt volume of container ships, under a tenth of the previous figure were sold.
These variations mostly reflected differing freight market performances. Rising prices offered by recycling yards proved unattractive in several segments (especially container ships and bulk carriers), compared with the incentives of high earnings from elevated freight rates, coupled with improved market sentiment about future trends. The principal exception was tankers, experiencing a depressed freight market through 2021 which was instrumental in boosting demolition sales.
Larger vessels sold for recycling were especially notable in 2021. Among tankers, scrapping of very large crude carriers, suezmaxes and aframaxes saw big increases. The number of vlccs increased from four of 1.2m dwt in the previous year, to 17 of 5.1mdwt, while suezmaxes rose from 2 of 0.3m dwt, to 16 of 2.4m dwt. Similarly aframaxes were up from 9 of 0.9m dwt, to 34 of 3.5m dwt. In the bulk carrier segment, two-thirds of demolition sales in 2021 were comprised of 14 capesize/larger ships totalling 3.4m dwt, down from 49 of 11.4m dwt in the previous year.
Higher box freight rates and container ship charter rates ensured that only 16 container ships were scrapped last year, compared with 79 in the preceding twelve months. All the limited container ship scrapping in 2021 was concentrated in the small vessel sizes within the feeder segment. Market rates were high enough to support employment at extremely profitable levels for almost any ship capable of carrying containers.
Events during the past twelve months demonstrated again that changes in scrap prices in the world recycling market usually play a secondary role in influencing shipowners’ attitudes towards selling ships for demolition. Typically the decisive influences are the charter market and freight rate levels, coupled with secondhand ship prices, and also expectations for the future trend. When incentives to continue operating older or relatively uneconomic ships are strong enough, as occurred during 2021, the motivation for owners to consider scrapping is largely removed even after there has been a large rise in scrap prices, as seen last year.
Prospects for future scrapping
Low demolition sales in the world merchant ship fleet during the past five years, in proportion to its capacity, implies more potential for an upturn in scrapping volumes over the years ahead. While a large part of the fleet is modern, it includes numerous older ships which are becoming uneconomic, reinforcing expectations of increasing demolition. An additional reason is the tightening international maritime regulations which probably will hasten the obsolescence of many older vessels.
Numerous ships have already reached, or in the next few years will reach, the end of a typical working life of up to around 25 years. Currently about 5 percent of the world fleet is aged 25 or more years, including many tankers and bulk carriers. A similar 6 percent is in the 20-24 years category, moving towards an age where scrapping is common. A large proportion almost certainly will be scrapped because of physical or mechanical deterioration resulting in uneconomic operation.
When a substantial amount of capital expenditure is required to prolong a vessel’s lifespan by five or more years, justification may be lacking. Freight market rate levels and secondhand ship values may not prove commercially viable, enhancing the attraction of the demolition option. The large extra spending necessary to ensure that a vessel complies with new regulations entering into force, especially those governing energy efficiency and carbon emissions, will impose another financial burden probably resulting in more scrapping.
Despite these signs, the unpredictability of future scrapping volumes, and the consequent low accuracy of forecasts, suggests that calculated levels may be viewed as largely speculative. Nevertheless broad indications of the likely direction – up or down – together with some ideas of the extent of changes which can be realistically expected, may be plausible.
In the context of unpredictable changes in scrapping activity, recent ideas suggesting a possible doubling of recent annual volumes seem worth assessing. It may be concluded that reduced annual volumes are the least likely outcome in the next few years, given growing pressures accelerating the obsolescence of many vessels in several categories. Rising demolition sales to breakers’ yards are more likely, although a strong acceleration in the immediate future is still perhaps difficult to envisage.
Scrapping forecasts – or just speculation?
How realistic is it to foresee an upturn in overall scrapping from the 24-25m dwt recorded in each of the past two years? As a broad indication an upwards trend could begin with some growth this year followed by a larger increase to perhaps 40-50m dwt in 2023 and higher levels later. Annual volumes at this level are not especially high based on historical comparisons with individual years within the past decade, when the fleet was well below today’s capacity. The fleet’s age profile and typical vessel lifespans support such ‘guestimates’ of potential volumes.
Typically the dominant driver affecting scrapping decisions is the evolving freight markets trend and expectations for future markets. In some segments it may be envisaged that market circumstances will become less favourable than seen recently or currently. Such circumstances point to higher scrapping volumes over time, amid diminishing incentives for owners to maintain in service older or less economic ships with lower secondhand values.
One example is container shipping, where box freight and charter rates may moderate as some of the abnormal disruption in supply chains recedes and a huge amount of newbuilding deliveries emerges from 2023 onwards. Some of the new capacity probably will effectively replace existing older tonnage, a proportion of which almost certainly will be scrapped. Conversely, in the tanker segment, returning crude oil seaborne trade volumes after the pandemic, amid economic recovery around the world, could contribute to an improving freight market and less incentive to scrap tonnage.
Regulatory impetus
Tightening regulations are likely to have an impact. A regulation being progressively implemented is the Ballast Water Management Convention. Newbuildings have been mandated to comply fully since 2017 but existing ships are permitted to attain the required standard within the period up to September 2024. Approximately one-third of world merchant ship fleet capacity at the beginning of 2022 had not yet incurred the substantial cost of retrofitting necessary equipment to achieve compliance. Retrofitting costs of up to $5 million may substantially alter calculations for a ship’s potential earnings over its remaining lifespan, especially if only a relatively short period remains. The adverse effect on capital costs for some vessels seems likely to be an influence contributing to scrapping decisions.
Also influential will be further regulatory changes being introduced soon. Newbuildings are already required to comply with mandatory measures intended to reduce greenhouse gas emissions, adopted at the International Maritime Organization. The regulations are set to be extended to all existing ships in January 2023, when the Energy Efficiency Existing Ship Index (EEXI) and the Carbon Intensity Indicator (CII) will be applied to regulate technical and operational aspects designed to contribute to the industry’s decarbonisation plans. Compliance could necessitate substantial capital investment and may adversely affect operating costs in many vessels, implying that scrapping may become a more attractive option, especially where the ship’s remaining lifespan is limited.
Pressure from stakeholders to cut carbon emissions in the world merchant ship fleet has become increasingly apparent as another influence affecting operational viability. Stakeholder groups exerting direct pressure include banks and other finance suppliers, cargo owners as well as the general public. According to classification society DNV cargo owners are “perhaps the most influential actor in the ecosystem surrounding a shipowner” and, in turn, they are affected by customers throughout the supply chain.
These considerations point to higher scrapping volumes in 2022 and over the following years, although the timing and pace of an upwards trend are not entirely clear. Because recent merchant vessel demolition sales volumes have been so low, a doubling of annual totals seen in recent years, which may seem a dramatic expansion, is not outside the range recorded in the 2012 to 2016 period. The possibility of typical freight market influences having an impact when these restrict vessel earnings in various future periods is a prominent influence. But an extra, large aspect is tightening regulations which, accompanied by other pressures for reducing ships’ emissions, could accelerate an upturn in sales for recycling.
Source: Article by Richard Scott, Managing director, Bulk Shipping Analysis and visiting lecturer, London universities, for Hellenic Shipping News Worldwide