Can Scrapping Container Ships Save Carriers From Overcapacity?

Ship Scrapyard pic by: Ctg4Rahat

This year has seen record low freight rates due, in part, to overcapacity.

To put it simply, there has been way more space on container ships than demand from shippers to fill it.

Overcapacity is not a new problem that suddenly appeared this year. Overcapacity has been putting downward pressure on rates for years now. In fact, five years ago I was writing about carriers suffering billions of dollars in losses as they faced overcapacity.

Despite this major overcapacity issue, carriers’ megaship craze has done nothing but grow, continuing to increase capacity.

Yes, that means more downward pressure on freight rates and, therefore, less profit for carriers.

It’s not the best time in history to be a carrier in the international shipping industry.

You know for whom it is good times? Scrapyards.

According to Drewry Maritime Research this year will see a record high in container ship scrapping (by TEUs):

Drewry’s Container Forecaster (June 2016) found that, for the first time, 450,000teu of containership capacity is expected to be scrapped in just one year, as the containership sector recognises that there are far too many ships chasing too little cargo (see http://www.drewry.co.uk/publications/view_publication.php?id=312).

Carriers know there is way too much capacity out there for the demand from shippers. If you can’t increase demand, shrink supply. Right?

Can scrapping container ships save carriers from the overcapacity that is plaguing them in the international shipping industry?

Scrapping ships certainly is a start, but even getting rid of 450,000 TEUs in one year is not nearly enough to squash the overcapacity problem. Drewry went on in its Container Insight Weekly, quoted above, to say:

Removing 450,000teu of capacity this year, however, accounts for just 2% of the current 20-million-teu-strong global fleet of containerships. This will only make a dent into the over-capacity built during the 2010-15 period, which saw 4.5 million teu in capacity added to the industry globally at a time of slowing demand.

450,000 TEUs subtracted this year versus 4.5 million TEUs added over the last several years? 450,000 from 20,000,000? That’s not much of a dent!

The surge in ship scrapping certainly is a start, but it is not nearly enough to solve overcapacity.