This is a re-post from the NM board where continued expansion of the drybulk fleet has become a contentious issue.
Are the owners of these new ships really fools or are they simply following a logic that is less than crystal clear to us. I would suggest two motivations for why shippers continue to buy vessels when the world fleet seems sufficient to serve demand. I will leave it to your consideration to tell me if there is merit here:
1) Clearing The Market Of Obsolete Vessels: Perhaps the notion that the life of a ship is 25, even thirty years is simply wrong. When given a choice, customers are only interested in chartering the first 15 years of a vessels life. After that, it might find spot charters for the next 5 years if in good shape. But agreements to accept vessels that are currently over 20 years old are a symptom of an overheated economy where vessels of a prime age have fallen into short supply. One might imagine that customers would be interested in cut-rate prices for aged vessels. But I don't know if you can make the case for that. The cost of shipping represents a relatively small fraction of the cost of the commodity being shipped and the customers desire a problem free experience with the vessel. So what appears to be an excessively large number of vessels being ordered is just the workings of a market designed to push the increasingly functionally obsolete vessels of over 15 years age into the scrap yard.
2) Future Demand: Granted many of these new orders are not desperately needed currently,but when the world economy recovers fully,there will be no excess fleet. The market could limp along making do with slightly overage vessels. But, the shipping owners know that if they can get into their fleet sufficient numbers of new vessels to serve future demand, they will effectively preclude the entry into the market by latecomers. You can't wait around until the demand is here. You have to anticipate future demand. And if you get in early, you discourage the entry by more conservative fleet owners who were waiting to see the demand has arrived. The inefficient part of this reality is that at the bottom of the cycle, some still functional vessels are going to be pushed into the scrap yard by fleet owners who are going to continue buying until expected future demand is served fully by prime aged vessels. At that point, new orders for vessels will be seen to tail off
I think it is much simpler than taht. This is an asset class which is heavily influenced by the availability and cost of financing. When rates are high and debt is cheap and easy, massive ordering happens. We are now living with the after-effects. At some point the excess orders will be gone, some yards will hopefully go under and demand will catch up with supply. That is starting to happen in the product tanker space, IMO. In dry bulk, it will happen in the next couple of years, especially if China reignites.
You are describing an asset bubble where too much cheap money (low interest rates) distorts buying decisions. But not all assets seem to be being driven up today. Though perhaps they are higher than they otherwise would be.
It occures to me that ships will continued to be ordered as long as they can be put into the fleet on long term charters at a profit. And that profitability is influenced only in part by the cost of capital. Its also influenced by the crashing cost of purchasing that vessel. The yards are surely working at break-even these days. And the potential profitably of the vessel is also influenced by the bias the buyers display for the newer vessels.
Unfortunately It matters nothing that each newbuild destroys the market for a 19 yr old vessel and so it goes to the breaking yard. And in this process, the world fleet is modernized.