What is Vessel Deconstruction?
At the end of a vessel’s useful life, when repair, upkeep and the implementation of mandatory regulatory enhancements render a vessel uneconomically unsound, a vessel can be sold for its raw materials, primarily its steel content. The useful life for a vessel is typically between 20-30 years, but the components that hold it together retain their value throughout, creating opportunities in vessel deconstruction.
A ship can be taken out of commercial usage before the end of its useful life, when the cost of running the ship becomes too high compared to available charter rates. Ship owners can choose between paying the costs associated with running the vessel when charter rates are low or retire the ship for deconstruction.
After setting sail for the last time, and arriving at their designated demolition yard, vessels are carefully deconstructed and its parts – from engines to steel beams – are sold. The purchase of a vessel for demolition is a significant undertaking that requires a large amount of up-front capital to acquire and deliver vessels.
Importance of Deconstruction to the Shipping Industry
Vessel demolition plays a critical role in the shipping industry. Removing vessels from operation, and thus reducing the number of ships available in the global fleet has a direct impact on global shipping rates. The greater the supply of available ships, the lower the price of global charter rates and the cost of shipping goods. Reducing the supply can increase charter rates, and thus the value of a ship. As such, demolition is oftentimes used as a corrective activity that keeps the active global fleet appropriately sized for corresponding global demand.
How it Works
When a ship owner decides to sell a vessel for demolition, he or she will put it up for sale. Companies that specialize in acquiring ships for deconstruction will bid on the vessel and once a purchase price is agreed upon, the acquiring company will either demolish the vessel themselves or more often, sell the vessel to a company to break down the vessel.
This company will subsequently sell the steel and other parts to third parties. A handful of countries rely on the recycled steel from these ships to help drive their economy, where demand for such raw materials is high.
Why We Like Ship Deconstruction Opportunities
Ship deconstruction opportunities are short in duration (average 30 to 120 days), are backed by collateral (the vessel itself) and are typically uncorrelated to the stock market. Regardless of charter rates, the scrap value of a ship provides a natural floor value to the vessel. Ships are mostly made of steel, and the value of steel is largely uncorrelated to the shipping industry.
Discover more about Marine Finance and the Baltic Dry Index (BDI).
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