Dr. Anil Sharma is a wealth of knowledge on ship scrapping, having started GMS 25 years ago, getting into the business of buying and disposing of old U.S. MarAd and Russian navy ships as a sideline while teaching as a college professor in Maryland.
Today his company is dominant in the field, and in the last year he has seen an unprecedented 70% run up on ship scrap prices, approaching $500 per ton. He weighs in on ship scrapping trends and direction, says an article published on OE digital.
GMS is the world’s dominant player in the business of buying ships and offshore assets for recycling, by number of ships, about one-third of the world’s annual transactions; rising to 40% if measured by lightweight tons. “We tend to do big ships, big projects,” said Dr. Sharma. “In terms of annual number of deals, the highest we have done is 300 plus ships in one year about one ship a day, and our lowest is around 150 ships. So (for GMS) it moves between 150 to 250 (ships per year) depending on how bad the world economy is, depending on which sector is being punished.”
The Offshore puzzle
Dr. Sharma said in the past he could count the number of offshore assets being scrapped on the fingers of one hand, “or maybe less than ten.” But today “the floodgates have now opened and the numbers are large.” But there are challenges.
The challenges in the offshore oil and gas industry today are well-recorded, and now you can add to the list the financials behind the decision to scrap or keep, as Dr. Sharma said that generally a ship owner would estimate a residual value of 20% remaining on a vessel after 20 to 25 years of service. “Twenty to 25 years is a long time to amortize 80% (of the purchase cost),’ but that doesn’t happen in offshore today. The gap between the new build price and the residual value is enormous,” he said. For the larger ships with the higher daily cost, the decision to scrap was not difficult.
The recycling yards – the world – were in lockdown, and GMS’ business model of taking about 50% of its ships ‘as is, where is’ proved particularly problematic with the difficulty in air travel globally. “We are constantly having crews fly all over the world, and that became a nightmare because of COVID and canceled flights,” said Dr. Sharma. “We were chartering planes, so the costs were going up, and even when we could land, you’d be quarantined for 14 days in hotels. Logistically it was one of the most difficult years, and the crew part has not really gone away.”But while the logistics difficulties mounted, something odd happened. Ship scrapping prices took off.
“In terms of the commercial aspect, it just took off. we gained in prices about 70% increase in residual values and scrap values in a matter of about eight to nine months: that’s huge, a 70% increase is unprecedented,” said Dr. Sharma. “Somebody was asking me just today, where is this going to stop? Because every day it’s a new benchmark, and prices keep on going higher.”
“I think most of us have accepted Hong Kong convention as the main way for sustainable recycling,” said Dr. Sharma. “So from the regulatory perspective, I think things are getting in place in terms of what convention to follow, what defines sustainable recycling. And people are accepting that there are good yards and bad yards everywhere. It is not country specific it is yard specific.”
“(Recently) a bank was saying that the RV they’re looking two years forward is only $50 per ton. Keep in mind today that it is almost $500 per ton,” said Dr. Sharma. “So people are like, really? Personally, I don’t see it that low. I normally tell my team a price around $300 per ton is a relatively good price to hedge forward risk. And we go case-by-case, because these cycles are very fast. You don’t have those nice gentle cycles because we are in the commodity business.”
Dr. Sharma said “everyone wizened up, and net fleet growth was quite sensible.” Instead Dr. Sharma likens the future of ship scrapping to ‘kangaroo hops’: a surge of business from one sector, then nothing. Then another surge. “It makes our life more interesting.”
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