The container ship recycling overhang, a result of low scrapping activity since 2021, is estimated to be at least 500 ships with a capacity of 1.8 million TEU (Twenty-foot Equivalent Units).
Causes of the Low Recycling Level
The low level of container ship recycling since 2021 is attributed to the following factors:
- Continued Trading of Older Ships: Many vessels have remained in operation beyond their typical recycling age, driven by strong market conditions that made it profitable to keep them trading.
- Minimal Scrap Activity: Only 10 container ships have been recycled so far this year (at the time of the report), continuing the low pattern seen since 2021.
- Aging Fleet: The share of ships 20-years-old or older has increased from 16% at the beginning of 2020 to a current high of 24%, a level not seen since the early 1970s. These older ships contribute to the overhang and will be the focus of future recycling.
Overhang Calculation
The overhang estimate is based on a comparison with historical recycling patterns:
- Minimum Overhang: Calculated using the average recycling pattern during 2000-2019, a period considered a good reflection of recycling during average market conditions. In this period, 20% of ships were recycled before age 20, and 53% before age 25. This yields the minimum estimate of 500 ships and 1.8 million TEU.
- Maximum Overhang: Calculated using the earlier recycling of ships during the weaker market conditions of the 2010s, resulting in a maximum estimate of 850 ships and 3.1 million TEU.
Implications and Future Outlook
The existence of this recycling overhang has several implications for the market:
- Fleet Growth Driver: The estimated overhang is larger than the order book for all ship segments smaller than 8,000 TEU. This suggests that future fleet growth will be driven mainly by the larger ships.
- Cascading Effect: The influx of new, larger ships and the lack of scrapping for smaller ones will likely lead to further cascading—the deployment of larger ships into routes where smaller ships are currently used.
- Accelerated Scrapping Potential: Future recycling activity may end up being higher than the minimum estimate due to several factors:
- The very large order book of new container ships.
- The threat of ship demand erosion if ships return to normal Suez Canal routings.
- Regulatory requirements to improve ship efficiency, which older vessels often struggle to meet.
- Recycling Timeline: Clearing the current overhang of 1.8-3.1 million TEU may take years, as the highest ever annual recycling volume was only 0.6 million TEU (185 ships) in 2016.
- Size of Overhang: The overhang represents an estimated 6-10% of currently trading ships, which is equivalent to 33-55% of the ships older than 20 years.
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Source: BIMCO
