Can scrapping solve the problem of global shipping overcapacity next year?

31 Oct 2022

By Eric Hunag.    Photo:Kristina Gain

In the past six months, due to the tightening of global demand, the shipping market has been quite different from the past two years. The market is so sluggish that people who are engaged in international logistics industry cannot help thinking that they are in the wrong business, and even begin to doubt their lives! Is the downturn in the shipping market the cause of the global economic recession, or is it Global recession leads to decline in shipping market? It's a chicken-and-egg question. Global inflation, weak consumer demand and excess shipping capacity are driving the market lower. A recession appears to be imminent as the economic outlook dims and central banks sound vague alarms. Oversupply has been a major concern for the shipping industry. China, the world's largest importer of commodities, has seen demand slow faster than expected, compounding the existing woes are the deliveries of ships ordered before the financial crisis. Global shipping capacity growth continues to outpace demand, resulting in depressed freight rates and affecting the development of the entire shipping market.


In order to solve the looming "serious risk of excess capacity" in container transportation, a period of active scrapping is required to absorb excess capacity. Demolition will be the main way to cut supply and reduce the risk of excess capacity, but it remains to be seen how much of the global fleet can be effectively destroyed. According to analysis by Alphaliner, the average age of the global container fleet is below thresholds, and following market trends over the past few years, the oldest ships are also the smallest in capacity.


According to Alphaliner data, the global cellular containership fleet consists of 5,627 vessels with a total capacity of 25.5 million TEUs and an average age of 13.5 years. However, this average is skewed by the smallest size of the oldest vessels, such as small feeder vessels between 500 and 999 TEU with an average age of 17 years, including 239 vessels 20 years and older. In the post-Panamax 5,300 to 7,499 TEU sizes, the average age is 16 years, and there are currently 115 ships worldwide that are 20 years and older. Across all sizes, Alphaliner calculates a total capacity of 655,149 TEU for ships aged 25 years and over, but if the standard is lowered to include ships over 20 years old, that number jumps to about 2.5 million TEU. Even a record 2.5 million TEUs of containership scrapping in 2023 and 2024 will not be enough to ease the expected launch of new tonnage ships over the next two years.


Major shipping lines have begun to take some measures to reduce capacity. In early October, shipping lines idled another 25 ships with a combined capacity of more than 110,000 TEUs to deal with trade lanes where many ships operate at 70% to 80% capacity only. The Alphaliner report indicated that the total number of idled vessels exceeded 76 vessels with a total capacity of more than 320,000 TEUs. Globally, more than 1 million TEUs of container ships are due for repairs at shipyards and lay-up, but Alphaliner also points out that this represents just over 4% of the total global fleet with more than 26 million TEUs capacity. The current idle capacity is almost equal to the total expected delivery of new ships in 2022. Last year and this year, the global fleet added 1.1 million TEUs of capacity each year. However, with total order volume currently at 7.3 million TEUs, capacity will grow by more than 28% by the end of 2025. According to estimates from the current shipbuilding plans of major shipyards, it is expected that 2.3 million TEUs will enter the market in 2023, and another 2.8 million TEUs will be added in 2024.


Due to strong demand and high contract rates over the past two years, the major shipping lines operate routes with a high rate of chartered ships, and shipowners will not be willing to send any ships for scrap unless they have no choice. The introduction of new carbon intensity classes may add some incentives, as some older ships may become unfavorable in cost analysis, but Alphaliner’s analysis shows the age of the container fleet points to little relief using the traditional economic measures for longevity. This imbalance is unlikely to be resolved by scrapping the old ship. Alphaliner expects that the global containership capacity surplus will continue for a long time, which also leads shipping industry analysts to predict that the freight rate will continue to decline.

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