Roughly 1.7 million twenty-foot equivalent units are sitting idle somewhere, and that number will only continue to rise.
When Hanjin Shipping collapsed at the end of August and proceeded to unravel in recent months, the shipping sector was already facing major overcapacity and weak demand, so the South Korean shipper’s bankruptcy only made matters more challenging in the industry.
The number of idle ships has nearly doubled from 238 vessels in November last year, with a total capacity of 900,000 TEUs, to 435 ships in November this year, which have a combined capacity of 1.7 million TEUs—and the sector has Hanjin to thank for 36 percent of that, the Journal of Commerce reported.
At the start of 2015, idle ships made up just 2.5% of the global fleet, but now that number is up to 9 percent.
“We infer from these changes that, as Hanjin was forced to pull ships from the east-west routes, the other carriers were able to increase the utilization of their existing vessels, as they did not add much replacement capacity,” JOC reported, citing shipping consultancy Drewry. Many carriers were trying not to feed the sector’s already chronic overcapacity.
There’s such a surplus of ships, that even though 13 percent of the global fleet has been sold for scrap, supply still isn’t in line with demand.
Shippers typically scrap ships after 25 years of service, but this year, a ship as young as 10 years was sent to scrap to avoid the losses on keeping it in work or even idle. More than 600,000 TEUs were scrapped this year and there were nearly no new orders for more.
“Only 200,000 TEUs of new orders have been made this year compared to 2.3 million TEUs ordered in 2015,” Maersk China chairman Tim Smith told JOC. “The big new ships will come and we will see the older, medium-size, inefficient, and non-operating vessels will become redundant and more of them will need to be scrapped, and that will eat away at the overhang in the next year or two.”
Shipping costs will likely creep up in that time too.
According to Drewry, though the cost of operating cargo ships is down in the last two years, it’s forecast to rise in 2017.
“2016 was another very difficult year for most shipowners and operators,” Drewry said. “Weak freight rates, declining asset values, eroded profitability and denuded cash balances have forced shipowners to reduce costs wherever possible, and vessel operating expenses have been no exception.”
Operating costs for vessels was down 4.4% in 2016, following a 1.5% dip last year. In the coming year, Drewry said manning costs may increase modestly as international wages rise.
“In the short term, it is evident that the direction of the wider cargo shipping market will continue to shape trends in operating costs,” Drewry’s Nikhil Jain said. “That said, the scope for further significant cost reductions is limited. We are still of the opinion that costs will rise in 2017 and beyond, but perhaps at lower levels than previously anticipated.”