Ship Obsolescence

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Highlighting a point from Bob Dohse' Human Smugglers-Ghost Ships

A crisis in merchant shipping has left a glut of cargo ships on the market, with low demand depressing prices and making an aging vessel particularly affordable 

Costly Bet on Big Cargo Ships Comes Up Short

 ships are more than a third larger than the largest ships of a decade ago, and the largest eclipse their surroundings at ports.
The glut of massive ships is adding to the overcapacity on the world’s busiest trade lanes, particularly the benchmark Asia-to-Europe route, pushing the cost of shipping a container from Shanghai to Rotterdam down to a record low 
Container-ship operators say they lose money in the long run on the Asia-to-Europe trade lanes if freight rates stay below $1,300 per container. Analysts estimate capacity in the route at around 30% above annual demand, which is expected to grow between 3% and 5% this year.
“The bitter truth is that with so much extra tonnage in the water the [rate increases] are meaningless,” said a senior executive of a major Asian carrier who asked not to be named. “A number of operators in Asia-Europe are already offering rates at around $300 per box and the price war will continue. The choice to invest so heavily in ULCSs is increasingly being questioned.”

Zombie Fleet:

Shipping has undergone a period of massive growth, fuelled by cheap debt and steady demand. The world fleet doubled in size between 2010 and 2013. At the same time, China doubled its shipyard capacity and took huge orders for new ships as it sought to control the commodities trade. "All of a sudden you’ve hit a market that’s gone flat. That is a radical change.
“If you’ve got more ships than there are cargos, then freight rates are going to be weak - it's that simple.”
The impact on ship owners' profits has been drastic. The average charter rate for the largest Capesize vessel – so-called because they are too large for the Panama canal and have to round Cape Horn - has fallen to around $2,700 per day. By contrast, they had traded within the range of $15,000 to $25,000 during the past two years, and briefly touched $250,000 during the mania of 2008, according to Mr Penn. Many trips are now loss-making as the cost of running a Capesize vessel, which at up to 340m is equivalent of almost four football fields in length, can run to $7,500 dollars a day. In a normal market the rational decision would be to remove loss-making ships from the fleet, but this is anything but a normal market. The world shipping fleet is drowning in debt.
Mr Kidwell describes how ship owners who have financed their fleets with 60pc debt and 40pc equity have seen that equity become worthless.
Meanwhile, the banks that provided the debt won’t pull the plug as they would be forced to recognise the losses. Instead, they accept that they won’t have debt service, and are forced to wait and see if the ship owner can survive until the market recovers. At some point in the future they might be able to sell the vessel at a better price.
Mr Kidwell said that a five-year old Capesize vessel was sold for $19m in recent weeks, 40pc below the normal listing price for a vessel that age of around $33m, and less than half the $48m cost of a new ship. The scrap value of ships has also plummeted as China pumps new steel onto world markets.
The collapse in prices for secondhand vessels will blow a hole in the balance sheet of any bank or individual that is sitting on those loans.

Cargo ship glut makes profitability a challenge

Until the late 1990s, the largest container ships could carry about 5,000 steel shipping containers, each about 20 feet long. Today, such ships are little more than chum. 
The Triple-E’s can carry more than 18,000 containers, piled 20 high, with 10 above deck and 10 below. But they can sail only between Europe and Asia, as their nearly 194-foot wide hull is too large to fit into U.S. ports or to slip through the Panama Canal.
Few carriers besides Maersk are profitable, too many new ships are being built, and demand for space on container ships is slowing as economies in Europe and Asia face headwinds. Shipyards, conditioned to build ever-larger vessels, are cutting prices to keep their order books filled.
“There are two types of companies that will survive this,” Sanders of Boston C?onsulting said. “Either you have the very large companies like Maersk” that “take advantage of scale and make money, or particular shipping lines that operate a niche where they dominate, like a feeder line out in Southeast Asia.

The largest cargo ship to ever land in the US is just too big for the business

shipping analysts say there just isn’t enough cargo for these outlandishly large sizes—growth in global trade can’t keep up with the potential number of containers that can traverse the world. In other words, there is a shipping glut.
Equally problematic for the Benjamin Franklin is that US ports are simply not prepared to offload a ship of its size efficiently, lacking the cranes, deep-water channels and infrastructure to get its cargo out of the port. The ship could not work at its full capacity without significant investments by US ports.

Too Many Boats, Too Little Cargo-The Monumental Glut In Global Shipping

When business slows and owners of ships and offshore oil rigs need a place to store their unneeded vessels, Saravanan Krishna suddenly becomes one of the industry’s most popular executives. Krishna is the operation director of International Shipcare, a Malaysian company that mothballs ships and rigs, and these days he’s busy taking calls from beleaguered operators with excess capacity. There are 102 vessels laid up at the company’s berths off the Malaysian island of Labuan, more than double the number a year ago. More are on the way. “There’s a huge demand,” he says. “People are calling us not to lay up one ship but 15 or 20.”
Globally, orders for new vessels dropped 40 percent in 2015, to $69 billion, according to London-based consulting firm Clarksons Research. The demolition rate for unwanted vessels jumped 15 percent.

I'll note by clear logical deduction that the aging rate of vessels physical decline didn't magically jump 15% in one year. even if maintenance was neglected, and even if a bolus of previous manufacture hit a ROI milestone, it's unlikely that the rate of demolition would jump that much at the same time new orders slumped that much. Clearly, ships are being disposed of at increased rates because the work isn't available for them, not purely due to deterioration or end of lifecycle. It may be in the interest of shipbuilders to claim that it is not cost-effective to operate older ships. That doesn't mean it is necessarily true. If ships that are not completely deteriorated are being disposed of early, then value still exists in them for other purposes. Is there enough value to be of use to seasteaders? That depends on the individual seasteaders' desires and capabilities, not on an absolute condition of the vessel itself.

Can “smarter” ocean cargo vessels reverse capacity glut?

The ocean container carrier industry has been plagued by overcapacity of late [...] “As carriers continue to over-invest in new ships, they are largely to blame for the chronically low profitability of their industry,” says Philip Damas, director of the London-based consultancy Drewry Supply Chain Advisor.

The clear inference is that ship obsolescence and disposal is being driven in some significant part by changes in business practices and availability of cargo, port capacity, and trade routes, not simply the age/condition of the vessel.

Why has Shipping got it so Wrong?

It is clear that the objectives of many investors in the publicly quoted companies were to chase short-term gains in ship values while cutting costs in all directions. However, most of the funds that have invested in the last 10 years have shown little or no return except for some day trading on shipping rumors.
The investment surge focused on building new ships to meet the perceived increased demand, with a view that the ship values would increase, enabling them to be sold for a profit as soon as they were delivered.


The Chinese boom lasted less than five years, but the new ship orders continued to deliver into the second decade and resulted in a 50 percent growth in the capacity of the world fleets of dry-bulk and container ships. The tanker fleets were also over-built as investors switched their attention away from the loss-making dry markets and also climbed into the OSV markets.
The result is a grossly over-tonnaged industry with depressed freight rates and reduced ship values. Many quoted companies face insolvency as the unavoidable costs of classification surveys loom and the balance sheet values of the ships are overstated.
Over the past two years, total rig count has declined by approximately 4 percent, while marketed vessels have declined by 15 percent (owners tend to stack rigs in lieu of scrapping). However, in the same time period contracted rigs have declined by more than 30 percent with fleet utilization levels hovering between 65 and 70 percent. Operators continue to see a fall in operating income as day rates and utilization remain at depressed levels.
IHS Markit reported that as many as 1,000 vessels need to be scrapped or permanently removed from service to achieve market balance by 2020. The current scrap rate is only about 13 percent of what is needed.

See Also: Boat Building