"A picture paints 1000 words" and that’s certainly true of the grim pictures brought back by intrepid explorers journeying to the Asian “recycling” yards. Beaches like battle-fields, are inhabited by barefoot workers who tear giant ships apart by hand (actually the bare feet are not due to poverty, but the fact that on beaches boots fill up with wet sand).

Picturesque Scrapping

But the picture painted by our graph of demolition since 1970 is even more vivid. It shows that dismantling ships is the most volatile part of the notoriously volatile shipping business. In 1970 monthly demolition was only 0.1m dwt but, after the oil crisis of 1973, it started to grow. Scrapping reached 1m dwt in January 1978; 2m dwt in March 1983; and 3m dwt in October 1985 when it peaked. Then there was a total reversal and by December 1988 demolition had fallen back down to 0.1m dwt again.

Nightmare on the Beach

What a nightmare business. Demand slumped by 97% in three years and stayed low until 1992 when an upswing started again. From 0.2m dwt in June 1991, scrap sales jumped to 1.8m dwt in May 1992; 2.5m dwt in April 1995, hitting a new record of 4m dwt in July 2003. Then another slump to 0.3m dwt in 2005 where it stayed until October 2008 when "all hell broke loose" and the next down swing started.

Get the Picture?

These endless fluctuations call for infinitely flexible capacity and the graph shows what a good job the demolition yards do in adjusting to these extreme changes. But, turn the picture round and on the other side is a vision of shipping investors struggling to decide when to scrap old ships. In decent markets they only scrap the un-repairable, but even in tough times they hesitate. Scrap ships do not bring in much cash - the 133 tankers scrapped this year only brought $134 million - and scrap ships can’t take advantage of an unexpected market recovery.

Painting by Numbers

So far in 2010 2.9m dwt of tankers and bulk carriers have been scrapped. On an annual basis that works out at 24.6m dwt, one third up on 2009 when 18.5m dwt were scrapped. Although tankers accounted for half, the pace is much slower than is needed to remove the single hull fleet in 2010. At today’s scrap rate, 15m dwt of single tankers will be scrapped in 2010, way below the single hull fleet of 51m dwt. So market watchers tracking orderbook slippage should note that at 2m dwt/month demolition is slipping too. It needs 3m dwt/month of tanker scrapping alone to wipe out the single hull fleet.

Portrait of the Artist

So there you have it. The picture shows that another wave of demolition is just getting started. But the picture of the next phase is still being painted. Like all artistic creations, what ends up on canvas depends on the artist. So our advice is this - get painting chaps. Have a nice day.