Scrapping Young, Shrinking Finance?
July 13, 2012 Leave a comment
According to brokers, the 1997-built, 171,978 dwt Capesize “SHAGANG SUNRISE” and the 1995-built, 151,283 dwt Capesize “STELLAR FORTUNE” have been sold en bloc by NYK for recycling to the cash buyer GMS. There must be at least another ten years of working life in these ships. Why are such young ships being scrapped and will this change the age limit that ships can be financed?
First, let’s put the sale into context. What is the average age of Capesize being sold for scrap? To analyse this we need a list of Capesize sold for scrap, and I am using Clarksons World Fleet Register (User Guidance – tick Demolition/Removals and the Vessels database. To calculate the average age you need to include “Built” from the Vessel Characteristics which is not in the default Demolition/Removals box, so we need to include “Custom” in the Data Grid to bring in this data. You could include “Age” but beware as Age defaults to calculate from today’s date – not the year the vessel was scrapped).
The average age of Capesize demolition in the last five years has been 26 years old, and so far 2012 the average age is 24 years old, so 15 years old is relatively young. But there has already been a sale of a 17-year-old, the 1995-built, 172,173 dwt Capesize “BET SCOUTER” was in June this year. Maybe the average in 2012 will dip lower still.
So we can see the latest sale is around ten years younger than the average for the last few years.
Let’s look at the ships. The “SHAGANG SUNRISE” and the “STELLAR FORTUNE” were both built at the Japanese yard of NKK Corp, and have been operated by major Japanese ship operator NYK throughout their life. This is an impeccable pedigree, and putting on a Sale and Purchase brokers hat, these ships are very marketable. Ok, the price would be low in this market, but there would be a queue of willing buyers in China and Greece. They would have gone for more than the estimated $9m each generated from the scrap sale.
Maybe it’s the economics of operating the ships? The”STELLAR FORTUNE” does seem to like a drop of the black stuff, running at 56.00 tonnes/day, compared to her peer group (type, size, age) average of 49.96 tonnes/day, a difference of 10%. But the “SHAGANG SUNRISE” has a reported fuel consumption of 49.80 tonnes/day, which is 11% lower that her peer group (55.51 tonnes/day).
The table shows the average fuel consumption of Capesize sold for recycling in recent years, and the lowest consumption. Of the two ships the “STELLAR FORTUNE” was perhaps the most vulnerable in the current high bunker price era.
Still, the sale for scrap goes against the usual pattern for Japanese operators like NYK, which, is to operate Capesize bulkers to the age of 15 years and then sell for further trading. By then the capital cost of the ship has been amortized down, and also the ship has completed the long-term charter it was built for. The ship no longer owes NYK any money and she is sold when its replacement is delivered. In the case of NYK, the buyer is usually an independent operator, or more recently a cargo owner/operator like Vale.
Maybe it is the Car Carrier story? The Car Carrier or PCC fleet is tightly controlled by a few operator/owners. At the end of life the ships are scrapped to prevent competitors getting into the market. It maintains the high cost of entry. The costs of entry into the Capesize market are relatively low, and ownership and operation is fragmented. Indeed in 2011 NYK sold two Capesize into the secondhand market, one being 13-years-old (1998-built, 168,968 dwt “OCEAN CREST”) and one 17-years-old (1994-built, 149,380 dwt “SUMA”), so the change to scrapping young ships is recent. NYK took delivery of 11 Capesize in 2011, and six so far in 2012. It still has eight Capesize in the fleet that are in the age range of the scrapped vessels. For NYK it makes sense to forgo the $2-3m extra over scrap a sale for further trading would have made. Here I think here we are seeing the application of Car Carrier model by the Japanese firms to the Capesize sector.
There may be a longer term change in ship finance indicated by the sale of these young ships for scrap. Banks usually look to loans of seven years with the expectation of refinancing at around year five. When the average age of scrapping was 30 years or more it meant there were several cycles of financing (and fees) once a Capesize came out of a Japanese fleet. If the average age of scrapping is now 24 years, as in the table above, it means after the initial 15 year charter backed financing with a Japanese operator, there is only one cycle of financing left, which is ok but is not going to generate repeat fees. What is more, if the ship is at the upper end of operating costs, she may not be competitive in the two tier high/low fuel consumption market. This would cripple the cash flow model, increase the probability of default, throwing a black flag out of the internal rating model (and note I am not saying that this happened in this sale). Rating models are not adjusted every time a sale takes place, but if the evidence mounts up that the end of life age for certain types of ships is moving lower, then the model will have to be adjusted and the age limit on what ships can be financed will come down.
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