The Shipyard, Scrap and Secondhand Markets

Abstract

The supply of shipping services by owners in the freight market is interlinked with the demand for vessels in the shipyard industry. The variable that drives the supply of shipping services and the demand for vessels is the demand for cargo by charterers. An increase in demand spurs owners to increase the supply of shipping services by increasing the average fleet speed; by putting back to the market laid-up vessels; and by placing orders for new vessels or buying ships in the secondhand market. Although a single owner has the option of buying a ship in the secondhand market, for the industry as a whole there is no such option, as transactions in the secondhand market involve a change of ownership, but no change in the aggregate stock of net fleet. At the industry level, the total supply of shipping services is equal to the stock of vessels that have been produced by shipyards, less the obsolete fleet that has been scrapped. The interrelationship of the supply of shipping services and the demand for new vessels is intertemporal. In the short run, the stock of fleet is fixed and owners can meet the extra demand for cargo by increasing the fleet capacity utilisation (fewer laid-ups or fast steaming). In the medium to long term, the stock of fleet is a choice variable. Owners choose the optimal fleet level, so that they can maximise profits in the long run. This gives rise to the demand for new vessels, which is inversely related to the price of new ships in the long run. But in the short run, the demand for vessels is positively related to the price — owners buy ships when prices increase, motivated by making capital gains.