Dry bulk shipping companies scrapped 256 ships this year, a sign of overcapacity

Ship retirement can indicate excess capacity

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The rate at which companies retire ships often reveals whether the dry bulk shipping industry is facing excess capacity or not. When the shipping industry is pressured by excess capacity, firms will often retire older ships to alleviate pressure on shipping rates and maintenance costs. Nonetheless, high levels of retirement often signal continued stress within the industry. Therefore, ship retirement reflects negative fundamentals in the short to medium term for shipping companies, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), Eagle Bulk Shipping Inc. (EGLE), Navios Maritime Partners LP (NMM), and Knightsbridge Tankers Ltd. (VLCCF).

Company scrapped 256 ships 

For the week ending July 5, the total number of ships retired since IHS Global Limited began collecting the data in 2005 rose to 2,100 ships, an increase of five ships from the prior week’s 2,095. So far, shipping companies have broken up 256 ships since the beginning of this year, which represents 3.04% of the 8,428 existing ships reported at the beginning of the year. This scrappage has helped keep supply increase low, which is showing some improvements lately, and will support fleet utilization.

Hypothetical Shifts to Industry Supply Curve (Ship Exits and Entrances) 2013-07-09Enlarge Graph

Does scrappage actually increase shipping rates?

Although basic economics will point out that lower supply raises shipping rates by shifting the supply curve, whether it actually does is questionable because firms tend to scrap older vessels that are less fuel-efficient and costlier to maintain. As these ships are more expensive, they’ll sit on the top right end of the industry supply curve. Thus, if the industry does retire some ships, the result can be either an A supply curve (in which shipping rates do not change) or a B supply curve (in which shipping rates do rise), shown in the hypothetical chart above. Given that the utilization rate sits at 83%—which is fairly low in the shipping industry—and several new ships have flooded the industry in the past, an increase in shipping rates due to scrappage is unlikely.

As long as companies continue to scrap ships, this trend is a negative indication that there’s excess supply or unprofitable ships in the market due to current or expected low shipping rates. This is negative for DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Eagle Bulk Shipping Inc. (EGLE), Safe Bulkers. Inc. (SB), Navios Maritime Partners LP (NMM), and Knightsbridge Tankers Ltd. (VLCCF) in the short term.

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