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Dry bulk scrapping age keeps moving upward

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In poor freight markets you might think that vessels were being recycled at a younger and younger age, but looking into the data a different story reveals itself.

However, the trend is very clear – dry bulk vessels that leave the fleet for recycling are getting older and older, according to a new analysis from BIMCO. Merchant vessels today are recycled four years older as compared to 10 years ago.

Chief shipping analyst at BIMCO, Peter Sand, says: “the commercial realities in the dry bulk freight markets spur ship owners to recycle ships that are no longer economically viable. When doing so the ship owner considers his total fleet-mix, seeking to find the optimal balance between older, but still viable, fully depreciated tonnage and recent deliveries entering into the fleet as part of a renewal process. Then, the poorest performing vessels get recycled”.

Average Scrapping Age, Dry Bulk Segment 2000 – 2011

The discovered trend of an average scrapping age that keeps going upwards may appear as counterintuitive. However, as larger amounts of tonnage are recycled it’s not “just” the age of the vessel that matters even though this is a relevant factor to consider. One reason for leaving an older vessel in the fleet-mix at the expense of a younger one is low running costs. A fully depreciated vessel may be preferred due to lower daily cash costs over a younger, but indebted, vessel carrying extra costs in terms of interest and repayments.

Moreover, an increasing scrapping age also tells us that there are a lot of older vessels still in service. There is, however, a natural upper limit as to how high the scrapping age might get, specifically amongst the large Capesize bulk carriers which primarily carry heavy bulk cargoes and coal. Coal may be relatively harmless, but i.e. iron ore is a different tough cargo to carry for the vessels, which in turn could limit the lifetime of a Capesize bulk carrier. As iron ore is an oxidising cargo, galvanic corrosion might take place in the cargo holds. This adds to the wear and tear on the hull structure. Moreover, high loading rates could challenge the operation of the carrier, its ballast water system and overall hull and structural strength.

Recycling activity in 2012: The 1987-built Panamax bulk carrier M.V. Vassilios II became the last dry bulk vessel to meet the blowtorch in February. Before that happened, a total of 4.1 million DWT had been recycled during the first two months of 2012. This is up from 3 million DWT in 2011 during the same period of time. Following the tonnage-gets-older trend from recent years, the average vessel that left the fleet via a breaker yard was built in 1983 with an average size of 55, 400 DWT.

However, it is noticeable that the three youngest vessels, breaking the trend, were all from the Capesize segment. In total five Capesize vessel with an average age of just 22.8 years left the fleet during the first two months of 2012. This compares to eight Capesizes with an average age of 28.5 years being recycled during the same period of time in 2011.

“The correlation between poor earnings and the volume of recycled tonnage is very strong, and intuitively it makes sense. Fortunately, current scrap prices offered in the market remains solidly around USD 460 per LDT. At that price level a Panamax bulker can bring back USD 5.5 million of cash to her owner in addition to removing the concerns over difficult future employment perspectives” adds Peter Sand.

Outlook: When judging earnings by the Baltic Dry Index, the first two months of 2012 have been horrific. This is especially true for the large Capesize vessels, which once again dug below the earnings of all others in the dry bulk segment to earn just USD 10, 300 per day in January and USD 5, 400 per day in February. This caused an owner to cut losses and break the youngest ever Capesize of 172, 972 DWT in early February, just 18.5 years of age.

BIMCO forecasts 20 million DWT of dry bulk to be recycled during 2012, as rates are expected to rise from the current very low levels. However, should the earnings of January and February become the norm for the year, recycling will be higher than the current forecast. But how much higher it potentially can go is something that BIMCO currently looks into for a publication soon to be forthcoming. Preliminary results point to a rather limited potential for the dry bulk fleet.

(Source: BIMCO dated: 13.03.12 and the graphic credit to BIMCO and IHS Fairplay)

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