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Why falling ship scrappage points to a positive outlook

Xun Yao Chen

Why dry bulk shipping shares will rise after a recent fall (Part 4 of 6)

(Continued from Part 3)

The significance of scrapping level and shipping rates

For a short-to-medium-term assessment of supply and demand dynamics, investors can look towards ship scrappage (retirement) activity. The rate at which companies scrap ships often reveals whether the dry bulk shipping industry is facing excess capacity. When excess capacity pressures the shipping industry, firms will often retire older ships to relieve pressure on shipping rates and maintenance costs.

Scrapping activity shows falling trend

On September 13, the total number of ships retired since IHS Global Limited began collecting the data in 2005 rose to 2,165 ships—an increase of eight vessels from 2,157 ships on September 6. So far, shipping companies have broken up 321 ships since the beginning of this year, which represents 3.81% of the 8,428 available ships reported at the beginning of the year. The eight-week rolling average number of ships being scrapped stood at 6.25 vessels, unchanged from the prior week, but it remains in a downtrend from the peak seen in 2012. This scrappage has helped keep supply increases lower, particularly among Supramax vessels, supporting shipping rates.

Dry Bulk Age Profile 2013-07-14

Falling scrappage is actually positive, not negative

At the start of the year, 6% of existing vessels were above 25 years old—the age that companies estimate to be the average useful life of each ship. Although companies often report the number of ships available to scrap as evidence of limited supply concerns, the reality is that several ships do celebrate birthdays beyond 25. Companies are also unlikely to scrap ships just because they’re old. Companies will often try to hold on to old vessels as long as they can find customers to use them. So although the industry can scrap another 200 ships, investors should see falling scrappage as a positive sign that shipping rates are rising.

Current trend positive for dry bulk shipping companies

As long as scrappage activity falls, it’s a positive indication that fleet utilization (supply and demand dynamics) is tightening, and that shipping rates will rise in the future. The current trend is positive for dry bulk shipping companies such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), Navios Maritime Partners LP (NMM), and Navios Maritime Holdings Inc. (NM).

Continue to Part 5

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