What is Mothballing
Mothballing is the deactivation and preservation of equipment or a production facility for possible future use or sale. It can also mean the setting aside an object or idea indefinitely for possible reuse or revisiting in the future. Machinery in a mothballed facility is maintained and kept in working order so that production or other use may be restored quickly. Mothballing is common with expensive capital goods, machinery, aircraft, ships, properties and other assets that are costly to create, have long useful lives and may be subject to unpredictable market dislocations.
Breaking Down Mothballing
Mothballing refers to the use of pesticides to prevent damage to clothing or other goods that are stored for a long time and may be subject to damage from moths or moth larvae. Mothballing can offer production flexibility to manufacturers that have high operating costs, as it allows them to quickly re-open a factory to produce goods based on temporary spikes in demand instead of on a continual basis at a potentially lower margin.
In production plant assets, mothballing requires considerable planning to ensure that production can resume quickly. Mothballing may lead to assets being put back into use, their updating and refurbishment, disassembly for resale and reuse of their parts, or outright scrapping for their salvage value (steel, aluminum and other valuable metals).
Mothballing is often neglected when companies are under financial duress. During the Great Recession companies frequently shut down plants simply by removing dangerous materials and other hazards and then locking the doors, leaving expensive and sensitive equipment to deteriorate. In short order, much equipment had become scrap. If work had been done to deactivate and properly mothball equipment much of its value could have been preserved for later use or sale.
- Think for the long term; chances are a market dislocation won't last forever.
- Set aside money for mothballing.
- Appoint a person to be in charge of mothballing and creating a strategy for executing it.
- Maintain permits.
- Handling hazardous materials early on; cleanup later will be far more expensive.
- Enlist experienced workers (operators, mechanics) to assist with mothballing.
- Keep good records of what was done and what is maintained and when.
A cyclical business that benefits from proper mothballing is oil exploration and drilling. Well-drilling equipment is expensive and oil prices have proven to be unpredictable, not to mention the boom/bust nature of the oil business. When prices fall, wells in some locations may become unprofitable and demand for new wells will fall. That equates to lots of idle drilling rigs. Properly mothballed rigs can allow drillers to go back to work once a cycle has turned in their favor. The difference in restarting a properly mothballed rig vs. an inadequately mothballed rig can be three or more times replacement cost.
One of the most common uses of mothballing involves aircraft (commercial and military). Such mothballing, or long-term storage awaiting possible future use, happens at aircraft boneyards or graveyards. Mothballing is also common with seagoing vessels, which are stored and maintained as "ghost fleets" for possible reconditioning, updating and recommissioning. The cyclical nature of shipping business, the unpredictability of energy prices, as well as the tight margins of the airline business means that mothballing these capital assets is common.