Investigation on the Demolition Market Over the Past Five Years Paper Example

Introduction

Ship demolition is typically affected by high levels of uncertainty, thus making it difficult for the market analysts to discern the direction the market is likely to take in the future. The demolition market plays an integral in balancing the supply and demand in the shipping industry. According to Karlis and Polemis (2016. P.1), demolition market is a primary driver of market equilibrium and the level of freight rates. 2018 was supposed to be a crucial year in the shipping industry when it comes to the balancing of the global growth of both dry bulk and tanker markets, thus compelling the ship owners to make tough decisions regarding the market operations to benefit in the long run. This task will focus on investigating the demolition market over the past five years.

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Investigation on the Demolition Market over the Past Five Years

Demolition market plays a significant role in balancing the supply and demand in the shipping industry, thus being considered as a suitable mechanism of establishing and driving the market equilibrium and the level of freight levels (Karlis & Polemis, 2016, p.1). The primary purpose of scrapping the ship can be attributed to both technical and economic obsolescence, and the activities are mainly influenced by forecasted freight market levels and frequency at which the more efficient and valuable ships are being introduced in the market (Stopford, 2013, p.3). The scrap value, which is a function of the realizable value of the materials and the corresponding cost of demolition is also a vital element affecting the activities of the market and eventual scrapping price. In the last five years, Karlis and Polemis (2016, p.2) observed that the ship demolition activities have been shifting from West European centres towards the Asian and Indian regions.

Currently, China, India, Pakistan and Bangladesh are among the top shipbreaking countries, and the four nations hold 82% and 92% regarding some ships and DWT demolished respectively (Hellenic Shipping News, 2018, p.2). The earnings and the freight levels have a negative influence on the decisions regarding sending of the ships to the demolition yards. Stoford (2013, p.23) demonstrated that relatively higher freight rates have resulted in higher earnings in the ship demolition market. This implies that high freight rates are likely to pave the way for the inefficient, old and technologically-outdated ships to operate profitably.

As long as the vessel still functioning and profitable, it is difficult for the ship owners to sell their ships for scrap; thus the existence of a negative between the freight levels and the number of vessels scrapped in the market (Hellenic Shipping News, 2018, p.2). However, it is established that there is a positive correlation between the decisions to sell a vessel for scrap with the scrap prices. This has led to a strong relationship between scrap prices and demand for the for scrap steel. Furthermore, the current price differences of scrap steel is a crucial element in the demolition market since it is being utilized as a suitable alternative source of Iron ore (Wang et al., 2014, p. 43). China is the leading steel producers, characterized by a 48% of the world's total steel production. Apart from being among the top ten crude steel producing countries alongside China, India is also among the vital ship dismantling nations (Hellenic Shipping News, 2018, p.2). It follows that the scrap steel produced in both China and India is mostly consumed locally.

In the demolition market, the sales of a ship dismantling are primarily orchestrated by an explicit deal between the demolition yard and the ship owners. Wang et al. (2014, p. 43) observed that cash buying is another common alternative for the ship dismantling in the market. Shipbreaking yards typically provide a small deposit and a bank letter of credit for 60-180 days. However, the majority of the ship owners mainly prefer cash payments to credit transactions (Stopford, 2013, p.32). The cash buyers in the demolition market usually act as the financial facilitators, indicating that there is a significant financial risk stemming from the time differences between the cash payment and the instance at which sell of a ship is made to the shipbreaking yard (Karlis & Polemis, 2016, p.4). The demolition market is also beleaguered by the perils of currency exchange fluctuations, and according to Stopford (2013, p.33), the financial risks can be heightened by the use of credit letter by the shipbreaking entity for the payment of the vessel.

The demolition activities are mainly concentrated in China, Bangladesh, India and Pakistan. This can be attributed to the fact that shipbreaking is a labor-intensive activity, characterized by a low-profit-margin from the proceeds of the ship dismantling, which does not encourage investment in the capital-intensive businesses (Karlis & Polemis, 2016, p.4). Throughout the review, it is revealed that the demolition activities thrive highly in low labor countries and such activities are mainly driven by the freight levels in the market.

Deterioration of the market conditions and freight market levels in various trading routes such as Asia-Europe and Trans-Pacific, resulted in a decline in profit margins, prompting the ship owners to rethink the demolition choice (Hellenic Shipping News, 2018, p.2). In the demolition market, the sale of the ship is often enhanced by an efficient banking system which avails letter of credits for the acquisition of the vessels to be scrapped. However, it is imperative to note that the success of the transactions depends on the cash buyers, who play significant financial roles in reducing the gap between the offered credit process and the deposited funds from the ship owners.

Market analysts had projected 2018 to be an important year when it comes to balancing the growth rate of ship vessels in both bulk and tanker markets. However, reports published by Clarkson Research Bureau early in the year indicated that relatively few deals had been completed towards the end of the first quarter of 2018 (Hellenic Shipping News, 2018, p.3). Currently, there has been lacking in the fluidity in the demolition market as depicted by large price differential among various Cash Buyers.

The analysis of the data retrieved from the Clarksons (on 26th October 2018) reveals that there has been a fluctuation in the scrap prices, highlighting the instabilities and uncertainties in the demolition market. The vessel recycling activities recorded a positive beginning of 2018, and towards the end of the first quarter, the dismantling activities remained higher, in annualized terms. However, the pace of the scrapping pace has since slowed down (Clarksons Research, 2018, p.2). A significant increase in the scrapping prices at the beginning of 2018 can be linked to the limited supply of the tonnage, experienced in the industry. However, the prices started falling towards the start of the second quarter (Clarksons Research, 2018). Price decline in the demolition market during the second quarter can be attributed to the improved sentiments in the dry bulk and offshore charter markets.

There is the need of having a sufficient recycling capacity, especially in the EU markets. For example, towards the end of August 2018, the ship owners requested the European Commission to facilitate the establishment of enough recycling capacity on the shipbreaking yards that had been approved by EU. (European Union, 2018, p.2). By the end of 2018, it is expected that all ships sailing under an EU flag will use a specified ship recycling facility which has been proved by the EU Ship Recycling Regulation. According to the findings published by Clarksons Research (2018), the significant improvements made in the Indian and China ship recycling facilitates is attributed to the technical cooperation on various levels of the market, coupled by close supervision of the demolition process.

The lower costs on labor and compliance have contributed to enormous success on Asian shipbreaking countries, which is identified as their primary competitive advantage which gives them an edge over their close competitors in the globe (Stopford, 2013, p.24). Extra income recyclers in India, China and Bangladesh, which is derived from the sales of equipment, machinery, and containers to the second-hand shipping markets such as Alang and Chittagong has contributed significantly towards the growth of these countries' demolition markets (Brewer, 2018, p.4). The use of the incentives for the existing ship recycling industries in Alang to embrace the need of upgrading their vessels can improve the demand and supply in the market.

Potential investors in the ship demolition market are advised to be keen followers of the currents and sentiments in the industry to ensure they utilize the available opportunities. From the analysis of the data provided by Clarkson Research, it is revealed that scrapping prices and related market conditions are highly volatile and uncertain. It is crucial for the market players to identify the possible low and peak seasons which is an essential strategy when it comes to making decisions regarding the expansion and contraction of the businesses.

References

Brewer, J. (2018). The recycling of Ships . All About Shipping , 1-6.

Hellenic Shipping News . (2018). Ships' Demolition Market Off to a Slow Start in 2018. Hellenic Shipping News , 1-3.

Karlis, T., & Polemis, D. (2016). Ship Demolition Activity: A Monetary Flow Process Approach. Multidisciplinary Science Journal of Maritime Research, 1-5.

Stopford, M. (2013). Global Shipping & Shipbuilding Markets Overview & Outlook. Non-executive President, Clarkson Research, 1-30.