The dynamics of fleet size and shipping profitability: the role of steel-scrap prices

  • Deree College,the American College of Greece
  • Lancaster University, Management School, UK
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We discover that in each shipping segment the price of scrap, earnings, and the fleet size are jointly determined. Deploying a Vector Error Correction model, we find that international steel-scrap prices explain ship scrap prices, but the price of nickel, crude oil, and seaborne trade have an even higher positive explanatory power on them. This dependence is mainly attributed to the economic nature of the major ship-breaking countries: they are all emerging economies, heavily relying on steel as well as nickel in their development process.

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... As a result, the demand-side is currently concentrated on South-Asia (i.e., Bangladesh, India and Pakistan) and Turkey. In 2019, Bangladesh represented 60% of the global ship-recycling market (SAJ, 2021), to the extent of their ship-scrap/offer price determining the global freight rate and ship investment (Andrikopoulos et al., 2020). Demand for end-of-life ships in South-Asia is driven by the local need for melting steel-scrap (Kagkarakis et al., 2016), and facilitated by open-beaching friendly sea-shore and abundant cheap labour (Hiremath et al., 2016). ...
... Lastly, Cluster C3 largely comprises conceptual/position papers which have provided general overviews of the environmental impacts from ship-recycling, as described in Cluster C1 and C2. Notably, it is General - (Andrikopoulos et al., 2020;Chatzinikolaou and Ventikos, 2015;Choi et al., 2016;Devault et al., 2017;Girgin et al., 2018;Kagkarakis et al., 2016;Knapp et al., 2008) Brazil China - (Du et al., 2018;Yan et al., 2018) argued that addressing environmental sustainability in practice will require regulatory implementation, for example, by policing proper waste management processes in the recycling facilities and subsequent disposal in the TSDFs (treatment, storage and disposal facilities) (Hiremath et al., 2016). Furthermore, interviewing the Norwegian ship-owners, Schøyen et al. (2017) found that substantial financial gains in substandard recycling and inferior infrastructure in the Asian dismantling facilities are considered as the root of sustainability challenges in this sector. ...
... An ongoing and growing line of research concentrated on the micro-level (Cluster B2 and C2), which typically emphasized the negative impacts of the sectorfor instance, impairing the immediate natural surroundings (Deshpande et al., 2013), and, causing socio-economic (Demaria, 2010) and health-related (Courtice et al., 2011;Deshpande et al., 2012) problems of the ship-recycling workers in the developing world. The other line of studies (2015 onwards), in contrast, adopted the meso and macro level perspectives (Cluster A1, A2, B1 and C1) and frequently made the case for more positive aspects of the sector, for example, reduction of global environmental emission for steel production (Ko and Gantner, 2016;Rahman and Kim, 2020), addressing the sectoral social and OHS problems through organisational (Mitra et al., 2020) and collective actions by the workers (Balasubramanian and Sarkar, 2020), supporting the local industrial ecology through circular usage of recovered material (Rahman et al., 2021), and, maintaining the dynamic balance among the four global shipping markets (Andrikopoulos et al., 2020). Taken together, the industry can be considered as largely contributing towards global sustainability when national/regional and industrial aspects are considered. ...
Resource recovery industries play a significant role in global sustainable development. Although existing reviews have been undertaken on how such sectors address sustainability, these tend not to consider the interconnections among sustainability dimensions in the macro (national/regional, international), meso (industry) and micro (firm/operation) levels of analysis. Taking ship-recycling as a focal resource recovery industry, this systematic literature review of 286 studies provides a holistic synthesis of six sustainability dimensions, producing a taxonomy of three sustainability challenge (environmental, social and economic) and three enabler (law and policy, technology and management) themes. Studies have to date focused on identifying the challenges, typically in a mono-dimensional manner, with less attention paid to developing enabling solutions. Across the challenge dimensions, sustainability is better regarded at the macro and meso levels of analysis, while remaining challenged and less understood at the micro level operations. Thus, the industry in its current state has been argued to face a ‘multi-level sustainability paradox’. Of the enabler themes, the law and policy investigations in ship-recycling predominantly addressed the macro-level issues in analysing the deficiency of current regulatory mechanisms and offering future ones. Conversely, the comparatively scarce studies on developing technological and management enablers have addressed the micro-level issues more to create environmentally and socially sustainable ship-recycling practices. This review concludes with suggestions for future research that considers a systems view to demonstrate how the sustainability challenges and enablers in ship-recycling are interconnected across various dimensions and levels of analysis – and form self-reinforcing vicious cycles which are more readily addressable through management enablers.
... To improve the profitability and efficiency of cargo transportation, shipping costs must be reduced. Moreover, the sustainability of the transport business is related to profitability and demand, which are influenced by reduced operating costs [2]. Currently, fuel cost is the biggest contributor to the overall operating costs of the shipping industry [3]. ...
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Owing to the stringent regulations on pollutant emissions that are imposed by the International Maritime Organization and increasing fuel prices, there has been significant research on developing cleaner fuels and novel propulsion systems. This study presents a techno-economical and risk assessment method for evaluating alternative propulsion technologies and cleaner fuels as substitutes for heavy fuel oil and two-stroke diesel engines in marine transportation. This analysis was carried out for two different journeys. Accordingly, we evaluated the economic benefits of using an enhanced intercooler/reheat combined gas and steam cycle or simple and intercooler/reheat combined gas and steam cycles that were fueled by marine diesel oil or liquified natural gas instead of a two-stroke diesel engine that was fueled by MDO as the propulsion system in a large container ship, considering different shipping routes. The results highlighted the advantages of implementing the simple, intercooler/reheat, and enhanced combined gas and steam cycles as propulsion systems. A sensitivity analysis was performed to investigate the effects of the fuel cost, capital cost, and hull fouling resistance on the economic analysis. For the routes that were considered herein, compared to a two-stroke diesel engine that was fueled by MDO, the simple, intercooler/reheat, and enhanced gas and steam combined cycles that were fueled by LNG increased the net present value by 78.3%, 78.5%, and 76.4%, respectively, and reduced the payback period by 38.8%, 38.9%, and 35%, respectively. Furthermore, the fuel and capital costs had a significant influence on the overall economic profit.
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Conference Paper
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Bu çalışmanın amacı gemi geri dönüşümü alanında yapılmış olan bilimsel araştırmalarda hangi konuların ön planda olduğunu ve günümüzde birçok endüstride kullanım alanı olan dijital uygulamaların gemi geri dönüşümü endüstrisinde kullanımına ilişkin ne tür çalışmaların yapıldığını tespit etmektir. Bu doğrultuda çalışmada, yerli ve yabancı yazın taraması yapılmıştır. Çalışmaya 2003-2021 yılları arasında yayınlanmış 62 makale ve 7 bildiri dahil edilmiştir. İnceleme sonucunda, gemi geri dönüşümü alanında yapılan çalışmaların çoğunlukla gemi geri dönüşümünün insan sağlığı ve çevre üzerindeki etkileri (%26), gemi geri dönüşüm piyasası ülke incelemesi ve karşılaştırması (%12), gemi geri dönüşüm endüstrisinin ekonomi açısından incelenmesi (%10) konularına odaklandığı görülmüştür. Bununla birlikte bu çalışmalarda analiz yöntemi olarak çoğunlukla nitel analiz (%32), istatistiksel analiz (%29) ve matematiksel modelleme (%23) yöntemlerinin kullanıldığı tespit edilmiştir. Ayrıca son beş yılda yapılan çalışma sayısının arttığı ve en çok çalışmanın 2017 ve 2020 yıllarında (10) yapıldığı görülmüştür. Diğer taraftan çalışma kapsamında, gemi geri dönüşümü alanında dijital dönüşüme ilişkin yapılmış bir bilimsel araştırmaya rastlanmamıştır. Bu nedenle çalışmanın sonunda bu alanda yapılabilecek araştırmalara öneriler sunulmuştur. Anahtar Kelimeler: Gemi Geri Dönüşümü, Dijital Dönüşüm, Yazın Taraması JEL Sınıflandırma Kodu: M10, Q53, L91
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We propose and evaluate explicit tests of the null hypothesis of no difference in the accuracy of two competing forecasts. In contrast to previously developed tests, a wide variety of accuracy measures can be used (in particular, the loss function need not be quadratic and need not even be symmetric), and forecast errors can be non-Gaussian, nonzero mean, serially correlated, and contemporaneously correlated. Asymptotic and exact finite-sample tests are proposed, evaluated, and illustrated.
The decision to sell a ship for scrap is driven by a number of factors with the most important being the state of the market cycle. The offered scrap price for the ship will also affect the decision of the shipowner. In this paper we support the view that ship scrap prices are affected by the currency exchange rates at the main demolition countries. We apply regression to evaluate our hypothesis. The regression results indicate a strong relation between ship scrap price and currency exchange rates of the main demolition countries albeit with some differentiations between vessel sizes. Keywords: Dry bulk market, Demolition, exchange
We examine whether investors herd in their decision to order or scrap vessels in the drybulk market. We decompose herding into unintentional and intentional, and test for herd behavior under asymmetric effects with respect to freight market states, cycle phases, risk-return and valuation profiles, and ownership of the vessel. We detect unintentional herd behavior during down freight markets and contractions. Furthermore, we find evidence of spill-over unintentional herding effects from the newbuilding to the scrap market. Finally, asymmetric herd effects are evident between traditional and liberal philosophy towards the ownership of the vessel, and during extreme risk-return and valuation periods.
We model the demolition market, an integral part of the international shipping industry. It is shown through the implementation of a Vector Autoregressive (VAR) model that international steel-scrap prices contribute decisively towards price discovery in the ship-demolition industry. Our finding is explained and attributed to the fact that the growth models of Southeast Asian countries, where the ship-demolition market is primarily located, rely on scrap metal imports. These are mainly obtained from the developed economies rather than the recycling of vessels. We then proceed to test the forecasting ability of our model and use it for price prediction in the ship-demolition market. We establish that it provides the decision-makers with a useful prediction tool which enables all stakeholders involved, the ship owner, the recycler and the cash buyer alike, to gain valuable insights of the underlying trend in the sector.
The economic feasibility and environmental impacts of three examples of end-of-life management options were analyzed with a cost–benefit analysis and an environmental life cycle assessment. The economics of ship recycling methods depend on various parameters such as the market price of reclaimed materials, ship purchase price, environmental and work safety regulation fees, labor costs, and overhead costs. Standard recycling methods are typically used in the U.S., EU, China, and Turkey. The example of recycling the USS Forrestal, showed that standard ship recycling methods can be profitable. Standard ship recycling methods must follow strict regulations, and therefore, can only release negligible amounts of hazardous substances into the environment. In addition, the reclaimed materials from standard ship recycling methods provide various life cycle environmental benefits. Substandard recycling methods, such as beaching, used in southern Asia countries, allow shipyard owners to outbid standard method recycling companies and remain profitable due to a lack of enforced environmental regulations. The non-compliance with environmental regulations, allows these substandard methods to release a large amount of harmful substances into the environment. The reefing option is neither economically viable nor completely safe for the environment, but it could improve the local economy and underwater habitats for local sea life.
This paper attempts to describe the shipping market of bulk carriers introducing for the first time macroeconomic factors in addition to other microeconomic and shipping market parameters. This is done by building explanatory models using Artificial Neural Networks (ANNs). In effect, the model tries to forecast the Baltic Exchange Dry Index (BDI) using real data for a twenty-year period for a wide range of macroeconomic factors (nineteen) and maritime indexes (four), for which data are available on a daily, weekly, monthly or 3-monthly basis. This depends mainly on the agency or bureau that is responsible for the compilation of every distinct macroeconomic figure. However, in case the figure under examination is tradable in a specific market, the data resolution may also depend on the characteristics of this market. The effectiveness of the model depends also very much on whether or not neu-ral networks are able to predict accurately the evolution of BDI. For this reason, a period around and after the financial crisis of 2008 was selected. However, the data series spans 20 years from 1991 to 2011 and in this way captures market movements in the more extreme up and downturns. During this period die BDI presented a steep decline of more than 90% and dropped from the level of 9,912 units (May 2008) to 558 units (Dec 2008). Therefore, this paper investigates whether it was possible to predict in June 2008, what would have happened 2,4,6,8 and 10 months forward. The results reached, after the implementation of the specific methodology described in this paper are satisfactory: models built using ANNs and taking into account macroeconomic factors in addition to other parameters (shipping and microeconomic) are able to pre dirt the evolution of the Baltic Dry Index much more accurately than existing methods. The performance of the model is very satisfactory for the prediction period, although there are really no robust models for accurate predictions for longer periods.
Little has been written about the ship demolition market, an essential element in the supply/demand balance for shipping. Either technical or economic obsolescence may be the cause for scrapping a ship, where the latter is strongly influenced not only by anticipated freight market levels, but the rate at which more efficient ships are being introduced. The scrap value of a ship is a function both of the realizable value of the materials within the ship and cost of demolition. Both are strongly influenced by the cost structures prevailing in the likely country of demolition. The paper explores not only the fundamentals of the ship demolition market, but the trends from the 1960s to the present. The shipbreaking market has moved in that time from being West European-centred to Asian-centred, concentrating for some years in Taiwan, but now shifting to the Indian subcontinent.
The topic of ship recycling has obtained considerable attention during the last two decades for a variety of reasons with the likelihood of the adoption of a new international convention under the auspices of the International Maritime Organization (IMO). This study applies econometric modeling to a unique data set to provide insight into the dynamics of the ship recycling market. The data set contains information on 51,112 ships over 100 gt and includes 748,621 events over a period of 29 years. The analysis confirms a negative relationship of earnings and a positive relationship of scrap prices for all locations while Bangladesh seems to be more sensitive to changes in earnings than the other locations and more likely demolishes larger and older vessels. The results for flag and ownership vary across scrapping locations with Malta and Cyprus indicating potential importance from a registry perspective. The overall safety profile of a vessel seems to be less important towards the probability of a ship being scrapped. Possible implementation of the convention at EU level will mostly likely affect Turkey while non-ratification of one of the major flags will most likely affect China or Bangladesh.
Forecast evaluation often compares a parsimonious null model to a larger model that nests the null model. Under the null that the parsimonious model generates the data, the larger model introduces noise into its forecasts by estimating parameters whose population values are zero. We observe that the mean squared prediction error (MSPE) from the parsimonious model is therefore expected to be smaller than that of the larger model. We describe how to adjust MSPEs to account for this noise. We propose applying standard methods [West, K.D., 1996. Asymptotic inference about predictive ability. Econometrica 64, 1067–1084] to test whether the adjusted mean squared error difference is zero. We refer to nonstandard limiting distributions derived in Clark and McCracken [2001. Tests of equal forecast accuracy and encompassing for nested models. Journal of Econometrics 105, 85–110; 2005a. Evaluating direct multistep forecasts. Econometric Reviews 24, 369–404] to argue that use of standard normal critical values will yield actual sizes close to, but a little less than, nominal size. Simulation evidence supports our recommended procedure.
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