Destroying Oil Overcapacity - Literally

Includes: DBO, USO
by: Paul Kedrosky

There is another side to my recent post about VLCCs floating around as contango oil storage units. With demand for containerships declining given shrinking world trade, the number chittagong needed worldwide is falling. The result? Dormant ships, which represent an expensive carrying cost for their owners.

What is a struggling containership company to do? Easy: Destroy capacity. You can take oversupply straight out of the market without the carrying costs of idle ships.

So far in 2009 we have seen record numbers of containerships being sent off to scrap yards in India, Bangladesh, Pakistan and China. Such yards are seeing boffo business in tearing apart ships as large as 4,000 teus, as the following figure shows. To put in context, so far in 2009 we have destroyed as much containership capacity as transited through Oakland annually back in the 1960s when it was among the largest ports in the world.

The following figure (from Alphaliner) shows the record pace of containership demolition in 2009: