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August 16, 2016

52 Million MT of Cargo Ships To Be Scrapped, Is Trucking Next?

The Wall Street Journal reports that about 1,000 ships that have the combined capacity to haul 52 million metric tons of cargo will be dragged onto beaches, cut into pieces and sold for scrap metal this year. This is second only to the record amount of capacity of 61 million so-called dead weight tons that were scrapped and recycled in 2012.
The global economic slowdown is putting shipping through its most bruising period since the 2008 financial crisis. Companies including Maersk Line, a unit of Danish conglomerate A.P. Møller Maersk A/S, Germany’s Hapag-Lloyd AG and China Cosco Bulk Shipping Co. have 30% more capacity in the water than cargo. As the companies, mostly based in Europe and Asia, fight for bigger shares of the global market, freight rates have dropped so low they barely cover fuel costs.
In the five years through 2015, owners ordered an average of 1,450 ships annually. This year orders through July fell to 293 vessels, or 11.6 million tons, according to U.K. marine data provider Vessels Value.
“Freight rates are dismal,” says Anil Sharma, president and chief executive of U.S.-based Global Marketing Systems, the world’s largest cash buyer of ships for recycling. “So you either idle ships, if you can afford it, or recycle.”
Mr. Sharma said the typical age for recycling a ship is 30 years. This year the average age of ships getting scrapped is about 15 years.
The overcapacity problem has been exacerbated by China’s slowing economy and anemic growth in Europe. Last year, Chinese imports from the European Union fell nearly 14%; Chinese exports to Europe were down 3% in the period. In this year’s first quarter, Chinese imports from the EU fell 7% from a year earlier, a decline matched by exports to Europe.
In the past, recycling a ship has typically generated about one-quarter of the price of a new vessel of the same type and size. But owners say a sharp drop in the price of steel has cut the rate of return to an average of 10% to 15% of the price of a new ship.
Two years ago, in India, Pakistan and Bangladesh were paying about $460 a ton of steel. Last year it was $300 and it is now roughly $250, shipowners say. Officials at the Alang scrapyard—one of the world’s biggest, on India’s West Coast—said prices were likely to stay low through the rest of the year, as China is flooding the market with recycled steel.
Braemar ACM expects about 550 dry-bulk ships to be recycled this year, 29% more than last year and 48% more than in 2014. About 170 container ships are likely to be scrapped this year, compared with 85 last year and 164 in 2014. The scrapping of other ship types, such tankers, car carriers, general cargo ships and fishing boats, bring the year’s total to about 1,000 vessels.
Sold for Scrap

Ships Ordered

Trucking Next
Shipping is peanuts compared to the revolution in trucking that’s on the horizon.
Here are some stats from the Federal Motor Carrier Safety Administration.
  • The maximum average work week for truck drivers is 70 hours
  • Truck drivers who reach the maximum 70 hours of driving within a week can resume if they rest for 34 consecutive hours, including at least two nights when their body clock demands sleep the most – from 1-5 a.m.
  • Truck drivers are requited to take a 30-minute break during the first eight hours of a shift.
  • Truckers have an 11-hour daily driving limit and 14-hour work day.
Key Ideas
  1. The daily driving limit is 11 hours maximum. The average is likely less, lets call it 10.
  2. Autonomous trucks will not have any limit. With driverless long-haul trucks, capacity will rise by at least 100% and perhaps as much as 140%.
  3. A massive amount of trucking capacity is on the horizon.
  4. Truck ship rates will collapse.
  5. The independent truckers will go out of business, unable to afford retrofit costs and unable to compete with the big trucking companies if they don’t.
The Fed will get a big boost in productivity. Will the Fed like the result?
Courtesy Mish's Global Economic Trend Analysis (EconMatters author archive here)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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