Diminishing returns

Malcolm Latarche
Malcolm Latarche

03 February 2016


With even the optimism of the New Year seemingly unable to lift shipping from its moribund state, the stream of poor omens continues. In January, so it is reported, Korean builders failed to secure a single new order for any ship type, thus highlighting that owners have realised that continual additions to the fleet at the present time are to be avoided. There were new orders elsewhere in the world but the only one of any significance was the huge $3.26Bn deal for a quartet of cruise ships by MSC Cruises at STX France. Putting that in context, it is almost double the $1.8Bn of orders that all Korean yards combined secured in January 2015. STX France is almost all that is left of STX’ foray into European yard ownership with 66% still owned by South Korea's STX Corp and the balance in the hands of the French state. The order along with others still on the book will secure jobs at the yard for several years to come. If the French yard order is a bright spot, there is a dawning realisation that for shipping’s fortunes to be reversed some brave decisions on scrapping will have to be made. If this is not done, then very soon all of those ships still in service will need to install ballast water treatment systems which could cost anything from $500,000 to $5m. Not a pleasant prospect for operators of Capesize vessels which are currently said to be operating at well below breakeven rates – possibly by as much as $4,000 per day. Not good either for system makers that were banking on a retrofit bonanza. Soon after that will come the imposition of the 0.5% global cap on sulphur levels that will require a switch to compliant fuels or the installation of a scrubber – both of which come with a large bill attached. Even scrapping itself could become a cost rather than a receipt if the Hong Kong Convention or the new EU rules come into effect and reduce the number of dismantling options available and with a glut of scrapping candidates the price for scrap steel follows the BDI down to new lows. It used to be acknowledged that, taking into account the capital outlay, the operating expenses and supporting the shore staff and the shareholders, the net profit in a ship was almost always equal to its final scrap value. As things stand the returns look to be diminishing rapidly.