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Demolition Activity: Dry Bulkers’ Light at the End of the Tunnel?

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Scrapping activity

The scrapping market is an indicator of the dynamics in the industry. Scrapping limits supply growth and keep rates from falling. The rate at which companies scrap ships often reveals whether the shipping industry is facing excess capacity. When excess capacity pressures the shipping industry, firms will often retire older ships to relieve pressure on costs and increase cash flow. So while rising or elevated shipping scrappage reflects a short-term negative outlook for shipping companies, it is essential to bring the market back to balance.

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Active demolition market

The demolition market for dry bulk carriers has been very active lately. This is due to the fact that spot rates and time charter rates are below the operating expenses for many companies. The outlook also doesn’t give hope, given the large orderbook and bleak demand outlook. If owners are not able to cover their operating expenses over an extended time period, they either go for laying up ships or scrapping older ones.

However, even with the glut in the demolition market and softening steel prices, demolition prices have been falling across the Indian subcontinent. In some cases, breakers have reached their capacity. This is also leading to pressure on demolition prices.

More scrapping needed

According to Deutsche Bank, the current scrappage only accounted for 3.5% of the total dry bulk fleet. This, however, needs to go significantly higher, ideally closer to the 6.3% witnessed during 1986. Accelerated scrapping and minimal ordering activity could relieve some pressure on rates. This could provide some relief to beleaguered dry bulk names such as DryShips (DRYS), Ship Finance International (SFL), Navios Maritime Holdings (NM), Scorpio Bulkers (SALT), and Star Bulk Carriers (SBLK). The Guggenheim Shipping ETF (SEA) invests in major shipping companies around the world. Ship Finance International (SFL) makes up 3.8% of SEA’s holdings. The SPDR S&P Metals and Mining ETF (XME) gives investors exposure to iron ore, coal, and other commodities.

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