Tuesday, April 29, 2014

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Drewry: Panamax ships will be scrapped before their time

The problem of the overcapacity of Panamax vessels working the North-South trades is likely to escalate when the expanded Panama Canal becomes operational at the end of 2015, according to Drewry Maritime's latest issue of Container Insight.

The publication says the opening of the widened Panama Canal is likely to lead to a massive surplus of Panamax container ships between 4,000 and 4,999 TEUs, and that many will need to be scrapped regardless of age. It will also hurt business for North-South trades that don't use the Canal, it said.

For example, Drewry looks at MSC's new service between Asia and West Africa, which will use 10 ships at approximately 4,000-TEUs each. The researchers say surplus Panamax vessels between 4,000 and 4,999 TEUs are keeping North-South charter rates down, making it easier for competing shipping lines to "penetrate the markets more deeply, regardless of need."

Shipping lines urgently need more economies of scale than are available with Panamax ships in order to shift into the black, as evidenced when Evergreen decided last month to route more cargo from Asia to the U.S. East Coast via the Suez Canal instead of Panama.

Container Insight predicts that once the Panama Canal's new locks are opened at the end of 2015 and more of these vessels become surplus to requirements, many of these smaller ships will be deemed obsolete and scrapped.

Nineteen vessels between 4,000 and 5,000 TEUs were scrapped in the first three months of 2014, compared to only seven in 2013, and one at the very end of 2012.

The major problem with scrapping these ships, according to Drewry, is that their average age in the sector is only 8.5 years, and 73 percent are less than 11 years old. Since many ships depreciate over 15 to 20 years, this means that much book value will have to be destroyed, which shareholders will frown on.

Container Insight said some owners would be looking to re-engine the youngest vessels, or even jumboize them.

The total vessel capacity of the Panamax sector is 2.8 million TEUs, 16 percent of the total container vessel fleet. If half of this capacity were to be scrapped once the Panama Canal is widened, Drewry said the overcapacity problem would disappear.


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