Panamax Ship Scrapping Not Enough to Reset Capacity Balance

container shipping industry, it won’t be enough to solve overcapacity.
Overall, 460,000 TEUs, or 2.6 percent of the global container ship capacity, were scrapped in 2013, a record high dating back to 1996, according to an Asian transportation report by Jefferies, a global investment banking firm. An increase in the scrapping of 3,000- to 5,300-TEU ships “stood out” in particular, according to the firm. In 2013, 73 3,000- to 5,300-TEU ships were sold for scrapping, compared with 32 and three respectively in 2012 and 2011. In the first seven weeks of 2014, 30 3,000- to 5,300-TEU ships have already been sold for scrapping, and Alphaliner has predicted that the “recent exodus of unwanted Panamax ships” will lead to a new record of container ship scrapping this year.
There are currently 72 Panamax ships
of 3,000 to 5,300 TEUs without employment, and 50 to 70 Panamax vessels, or up to 8 percent of the current fleet, are expected to be scrapped in 2014, Alphaliner noted. Panamax ships are coming under pressure on trade lanes that do not transit the Panama Canal, which now account for 65 percent of all Panamax vessel deployment. On the Far East-U.S. East Coast trade lane via the Suez Canal, Panamax ships represent 54 percent of the total weekly capacity, compared with 74 percent in January 2010, as carriers increasingly favor the use of post-Panamax ships on this route, according to Alphaliner.
Furthermore, on the Indian subcontinent and Middle East-related routes, Panamax ships account for 15 percent of fleets, but will face redundancy even more as port infrastructure, especially in India, is upgraded in the region to accommodate larger ships, Alphaliner said. For example, Nhava Sheva, which accounts for 40 percent of India’s container traffic, will soon be able to accommodate ships with drafts of up to 14 meters, which will allow for the increased use of post-Panamax ships of up to 7,500 TEUs.
Approximately 1,000 vessels in the 3,000- to 5,300-TEU class size are deployed on the trans-Pacific, trans-Atlantic, long-haul intra-Asia and north-south trades, Jefferies said. As 6,000- to 9,000-TEU vessels from Asia-Europe cascade to these long-haul trades, many of these smaller ships are “becoming obsolete,” as they are “too big to be fully utilized in short haul trades and too small to compete in long haul trades,” Jefferies explained.
Many of the 3,000- to 5,300-TEU vessels were built during the ’90s when “fuel was cheap and high speed was a positive service differentiator,” Jefferies explained. Ships of this class size consume 140 to 160 metric tons of bunker fuel per day at their designated speed of around 22 to 24 knots, but even at a reduced speed of around 16 knots, bunker consumption per day would still be close to 50 to 55 metric tons for the ships, compared with 70 to 75 metric tons for the 8,500-TEU ships.
Among these scrappings were Maersk Line and Hanjin Shipping’s disposal of 27 units of between 3,600- and 5,300-TEU vessels, plus Cosco’s recently scrapped eight 700- to 4,200-TEU ships, with more disposals expected later this year, Alphaliner noted.
Jefferies explained that more operators are willing to sell their owned vessels for scrapping, as 16 of the 30 3,000- to 5,300-TEU ships sold so far this year were owned or on finance lease by container lines. In 2013, most of the 3,000- to 5,300-TEU ships sold for scrapping were from pure shipowners.
The average age of 3,000- to 5,300-TEU vessels being sold for scrapping is also dropping, which is another sign that these ships are becoming obsolete, according to Jefferies. The average age of the 30 3,000- to 5,300-TEU vessels being sold for scrapping this year fell below 20 years, Jefferies said, and some of them are as young as 17 years, according to Alphaliner.
The clear-out of these ships will also help trim the idle container ship fleet, which currently stands at 4.5 percent of total fleet, as the Panamax sector accounts for 35 percent of the total unemployed fleet in TEU terms, Alphaliner said. However, “significant” idle rates are expected to persist throughout most of the year, especially for vessels below 5,000 TEUs, Alphaliner noted.
Despite the lower supply growth estimates, the market is expected to remain oversupplied anyway, as demand grew by a “meager” 3.7 percent in 2013, compared with capacity supply growth of 5.7 percent, Alphaliner said. In 2014, demand growth is predicted to rise to 4.4 percent, but that will be insufficient to absorb capacity growth of 5.5 percent, according to the analyst.

The weak outlook is expected to keep freight rates under pressure in 2014, Alphaliner concluded. However, delivery slippage is anticipated as non-operating owners will likely delay deliveries in the face of low demand and low rates. There are about 80 ships totaling 302,000 TEUs scheduled for delivery this year to non-operating owners that are without known charter employment.
Several orders at financially troubled shipyards could also be delayed into 2015, with some owners taking the opportunity to cancel the delayed orders, Alphaliner said. Zim recently canceled its remaining orders for four 12,552-TEU ships and four 8,800-TEU ships, which were ordered at the height of the price boom in 2007-2008 and were later delayed.
“Although most of these canceled ships will still find their way into the market as they are already in advance stages of construction, their deliveries could be deferred as the shipyards or their new owners will face significant difficulties in finding profitable employment in the current depressed market,” Alphaliner said