Ship demolition activity. An evaluation of the effect of currency exchange rates on ship scrap values.

Abstract

The demolition market assists in balancing the supply and demand in the shipping industry and from that perspective is a major driver of market equilibrium and the level of freight rates. Even so, literature related to ship demolition, focuses mainly on the environmental and regulatory aspects of the topic. Literature related to the economic analysis of the industry and the factors affecting demolition activity is rather limited and sporadic. From this perspective the current paper is helpful to further build up insight of the shipbreaking industry.
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.

JEL: L11, R49, Q53