Strong charter markets and high second-hand values have given shipowners a clear incentive to keep older vessels trading profitably for longer. As a result, recycling decisions have been postponed across several sectors. But the absence of these ships from today’s recycling market should not be interpreted as an absence of future recycling candidates. The vessels remain in the fleet, continue to age and, in many cases, will still have to reach the recycling market in the years ahead.
Over the next three to five years, tankers, bulkers, containerships and pure car and truck carriers are expected to provide significant recycling tonnage. Tankers and car carriers, in particular, could contribute more vessels than the market currently anticipates.
The key issue is therefore not simply the number of older ships still operating, but the moment when their owners conclude that keeping them in service no longer makes commercial sense.
For now, market conditions continue to support older vessels. Yet many owners are responding to broadly similar charter and asset-value dynamics. Should those conditions deteriorate, retirement decisions that have been deferred for several years could begin to converge. Instead of a gradual recovery in recycling volumes, the industry could then see a much faster increase in the supply of vessels heading to recycling yards.
Charter earnings and second-hand values are closely linked, making this relationship particularly important. When earnings remain strong, an owner can either continue operating an older ship or potentially sell it into the second-hand market. If freight rates weaken, however, both options can become less attractive at approximately the same time.
The calculation can change further when an ageing vessel approaches a special survey, requires significant maintenance expenditure or needs additional capital investment. At that point, recycling can quickly become the more compelling commercial option.
Importantly, such a shift does not require a dramatic collapse in the market. A relatively modest deterioration in expected earnings may be sufficient to alter the economics of a vessel whose operating life has already been extended through several profitable years.
A ship can remain technically capable of trading for longer, yet the commercial equation may no longer justify it. If the owner must commit substantial additional capital without enough confidence that the investment will be recovered, recycling takes on a very different appeal.
There is no certainty that these conditions will trigger a sudden rush of vessels toward recycling yards. Owners that have accumulated strong earnings may have sufficient financial resilience and appetite to continue operating their ships through a weaker market. That could spread recycling decisions over a longer period.
What the industry should avoid assuming, however, is that every owner will have the same financial justification or willingness to keep an ageing vessel trading.
A longer-term capacity question
This is where today’s shortage of recycling tonnage raises a broader question for both shipowners and recyclers.
Owners should not assume that because recycling capacity is readily available today, the same level of availability will exist when they eventually decide to sell. If weaker earnings arrive at the same time as major expenditure becomes due across several ageing fleet segments, recycling facilities could move relatively quickly from competing for limited tonnage to handling a much stronger flow of vessels.
For owners, this makes recycling a consideration that should form part of the commercial planning for a vessel’s final operating years, rather than something addressed only once the next major investment has been rejected.
That does not mean retiring profitable ships prematurely. It does, however, mean understanding recycling options, available capacity and likely timing before the decision becomes unavoidable.
Recyclers face the reverse challenge. They need to prepare for a potential increase in supply without assuming that forecasts for future recycling volumes will necessarily translate into a predictable number of vessels arriving every year.
The ships are still there. They are simply getting older.
Ultimately, commercial conditions will determine when those vessels come to market. After several years during which recycling decisions have been deferred, the industry should be prepared for the possibility that those decisions will not necessarily unwind gradually.
