Ships – we should sink a few

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How did capesize ships become so cheap? Iron ore prices have been close to record highs, and demand for commodities is strong. Everything seems to point to expensive ships. However, shipyards tend to build ships without considering long-term demand. With no barriers to entry, no real technology limits, and an unlimited demand from governments for capacity-building, ships will probably never make money for investors.

Every regional government loves a shipyard when it is new. It provides lots of chances to cut ribbons, destroy bottles of champagne, and employ lots of constituents with voting power. Regional governments in China especially love steel mills and shipyards.

Historically, we have built ships, operated them for 25 years, and then scrapped them. Since 2002, that system has fallen apart.

For five or six years, demand for ships overly exceeded supply. During this period, no one could go wrong building shipyards. Every coastal regional government in Asia wanted in the game. The problem is shipyards do not shut down, have no interest in not selling ships, and are willing to lose money to keep employment up.

Now we have an extraordinary expansion of fleet. One would almost say record. According to Alaric Nightingale at Bloomberg, “The transportation capacity of the capesize fleet will expand 17 percent this year to 247.1 million deadweight tons, while trade in iron ore will swell 7 percent, according to estimates from Clarkson Research Services Ltd.”

New ships in excess of demand are a feature of the market that is here to stay for the indefinite future. Nothing short of regime change in China will reduce fleet size growth.

We propose creating a new TV show: Shipyard Wars. Much like junkyard wars, we will invite countries to sponsor ships for ramming and other warfare with no people on board. The rules will be simple: nothing larger than a 50-caliber machine gun, remote operation, limited fuel on board that can be safely recovered once the ship is sunk, and national TV coverage. Who would not turn on the TV to watch crews get ships ready, set up equipment, and then have a naval battle?

The other option is the most rational one. Regional governments in China should have a policy of buying an old cape and scrapping it for every new cape they build. If they cannot trade in the old ones and still make money, they should not be allowed to make new ones. The Chinese government could enforce this, but then again the Chinese government probably loves the cheap freight.

Since no one is going to use the ships for good TV, and no owner is willing to scrap a ship early, get ready for years of cheap freight, which will be great for the miners and the steel mills.

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