The shipping markets are a journey; they have their ups and downs and their flat bits. As any parent will tell you, the first question you get on a journey from the back seat – usually five minutes after its start and every ten minutes thereafter – is, “Are we nearly there yet?” It’s a question the shipping markets are perennially trying to answer. However, the answer sought is less about the destination than about the next stage of the journey. Have we reached a peak and are we about to go down; or, are we at the bottom and about to go up. There’s little dispute about what the current question is. What we need is some clues to the answer.
Big Picture…Not Enough
There are plenty of indicators for the journey. The big picture is not always the best guide. Although the orderbook and fleet growth are present, demand is only ever viewed via the back mirror, so getting the supply/ demand balance into focus takes time. What are needed are more readily accessible guides. Indicators such as earnings and ship values that reflect the journey the shipping markets are on. Our Graph of the Week shows some of these signposts for the dry bulk market, specifically for Capesize vessels.
The graph shows, first, the ratio of 5-year-old to newbuild prices and where the former represents 80% (its “equilibrium” level based on a 25-year life) of the newbuild value. Secondly, it shows Capesize earnings – both spot and 1-year timecharter rates.
For the decade 1992-2002 values were around 80% of newbuild levels and supported by relatively stable earnings, mostly with little difference between spot and timecharter levels. Basically a period of equilibrium (a flat bit). The next six years, 2003-08, was a period of exhilarating short termism with second-hand prices being bid up rapidly, eventually to as much as 1½ times newbuilds. And confidence led period earnings and newbuild prices to chase them up.
Off The Map…
A down bit inevitably followed as the market changed into a lower gear, which brings us to our present juncture. Confidence has taken a hit and second-hand prices have dropped below their “equilibrium” and pre-boom levels to about 70% of newbuilds. Cheap tonnage anyone? However, spot earnings have declined even further and are lower than at any point in the last quarter century. Can they go any lower? Better news is that 1-year rates are higher than spot earnings and have been for the past 15 months. Moreover, 3-year rates are higher than 1-year rates and 5-year rates better than 3-year rates. This suggests there is a more optimistic view of the longer term out there.
Get Your SatNav Out
Well, are we nearly there yet? There is more activity in the second-hand and newbuilding markets and chartering spreads look optimistic. But if you want to hit that turning point keep reading the signs or, better, use your SatNav. Happy motoring.