Benefits of old age: world’s fleet is getting older but more expensive
Average age of the world’s merchant fleet has increased by 10% over the recent decade largely due to the environmental agenda. Meanwhile, it makes investments in five year old tonnage more profitable, hence certain opportunities for Russian ship owners.
Average age of the world’s merchant fleet has increased by 10% over the recent decade, according to the UNCTAD report. By number of ships, the current average age is 21.9 years, up from 19.9 years in the end of 2012.
According to the report, ships are getting older partly due to shipowners’ uncertainty about future technological developments and the most cost-efficient fuels, as well as about changing regulations and carbon prices.
“The world needs a new generation of ships that can use the most cost-efficient fuels and integrate seamlessly with smart digital systems. But shipbuilding volumes remain low. The global commercial fleet grew by less than 3% in 2021 – the second lowest rate since 2005,” reads the report.
Indeed, the stake on decarbonization which has no clear solution yet and therefore leads to a delay of investments in new ships entails a quite unexpected aspect: the popularity of recycled steel is growing, as its production has a lower carbon footprint. This, in its turn, raises the cost of a relatively young fleet and the profitability of ship recycling.
Baltic Exchange has recently issued the analysis of the dry bulk carrier values undertaken by consultancy Zuoz Industrial looking at the potential impact of longer-term higher ship recycling values on five year old tonnage.
Although down 20% since its April 2022 high, the price of lightweight steel is about $520/ldt and more than double the historic average since 2009.
“Should the current multi-year higher cycle value turn out to be a fundamental risk trend supported by some of the evolving demand factors, the fundamental risk of investing middle aged dry bulk tonnage, particularly in softer freight markets, will have decreased,” says report author Urs Dür.
How can it help Russia? Actually, the country has virtually no fleet of large-capacity bulk carriers. But it is necessary for the export of coal, ore, mineral fertilizers, and other bulk cargoes. In the current geopolitical conditions, dependence on foreign carriers threatens with dismal consequences. At the same time, Russian shipbuilding does not have facilities with a capacity sufficient for serial production of large bulk carriers. In this respect, the growing profitability of investments in used, but rather young bulk carriers plays into the hands.
According to Ivan Blagodatskikh, representative of TransFin-M, who spoke at the Maritime Congress in Moscow, Russia needs a fleet of bulkers with a total deadweight of 70 million tonnes to ensure its transport independence in the segment. With Panamax bulkers the figure is huge – over 1,000 units! The only way to create such a fleet is to purchase ships in the secondary market.
In this context, it should also be noted that the global market of bulk cargo transportation is quite stable as compared with the tanker and container segments. Thus, the Baltic Dry index rose at the end of 2022 and remains at about 1,400 points, an increase freight rates is observed in the segment of Capesize bulk carriers, but freight rates for bulk carriers of other sizes (which are in higher demand in Russia) remain stable. This suggests that we cannot expect any price volatility in the secondary market of bulk carriers in the near future, hence higher predictability of investments in the purchase of such ships.
Anyway, it will be difficult to succeed without state support just like in the case of container fleet, since the purchase of large ships requires essential capital expenditures.
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