Price indicators can tell market-watchers many things. In the volatile shipping markets they can provide a helpful window on both the health of today’s markets and expectations of future conditions. In the case of the latter, they may not be correct but it’s always interesting to take a look. So, how do price indicators help us gauge the state of play?
The Price Is Right?
In a “normal” market, or at least when owners have the expectation of one, the price of a 5-year-old ship should theoretically be about 75-80% of the price of the newbuilding, reflecting that merchant ships have a 20-25 year economic life and depreciate accordingly, other things being equal. The Graph of the Week shows the 5 year old to newbuild price ratio for a Capesize bulkcarrier, a VLCC tanker and a 2750 TEU containership for the last 10 years.
Bulk Better, Box Bottom
Well, today’s VLCC price ratio is right on the 75% mark, having dropped as low as 58% in late 2011. What does that tell us about expectations? Crude oil trade is a mature business with 1% growth expected in 2014, but VLCC fleet expansion is projected to be sub-2% this year, so that’s a better balance than for a while. On the dry side the Capesize price ratio (which once hit 160% as owners sought to get their hands on tonnage at the height of the boom) is flourishing at 90%. That might be a good representation of expectations, with sentiment seemingly fairly positive, Capesize fleet growth expected to slow to 4% in 2014 and iron ore trade expansion projected to motor on at 10% this year.
The ratio for the 2750 TEU containership is much lower, standing at 51%, almost as low as the 44% seen in 2009 (though it’s higher in some of the larger boxship sizes). Given the size of the surplus generated by the 9% downturn in trade in 2009, the box sector remains a bit further behind the curve than the bulk sectors. And here the difference in potential fuel efficiency between new designs and older ships is starker, pressuring the secondhand asset price further.
So the ratios today seem fairly well aligned with market perceptions. But how have they fared since the onset of the downturn? Since September 2008, the Capesize ratio has spent just 33% of the time below the 75% line. The VLCC ratio has spent 65% of the time below 75% but only 29% of the time below 65%. So, in those sectors the impact on asset pricing could have been worse.
Was It So Bad?
The downturns in the 1970s and 1980s were far harsher on asset prices. In the late 1970s the ratio for both a Panamax bulker and for an Aframax tanker dipped as low as 40%. Interest rates were much higher, and the banks were much quicker to foreclose on “distressed” assets. This time, despite the slump in 2008, the price ratios haven’t suffered so dramatically (in the bulk markets at least) and investor appetite remains. However, part of that is a reflection of today’s expectations and time will tell how well investors have forecast future market developments. Have a nice day.