There’s been a ripple of déjà vu round the market this week, as the BDI edged towards its 1985 low. These statistical records are entertaining, but somehow this doesn’t feel like the 1980s. That was a bleak desert, when cash buyers could pick up nearly new ULCCs for scrap price. Although times are not brilliant today, it doesn’t feel that miserable. And nowadays the odd bad fixture doesn’t bankrupt you.
First Time Lucky
So is it the 1980s all over again? There are two discouraging similarities. One is that the oil price is playing games again, shooting up, winding everyone up about eco-ships, and then suddenly falling out of bed. Another is a shipbuilding capacity mountain, which seems to have a knack of sucking in orders. It happened in the early 1980s, and it’s happening again now. Then it was delivery of the 1982-3 Sanko-led bulker ordering binge that killed the embryonic market recovery in 1985. Now bulkers are again pouring into the market (over 50m dwt is projected for this year). So there are similarities. But there are some major differences too.
We Love Trucking
The first is demand. In the 1980s dry bulk was hit hard by the recession triggered by the 1979 Oil Crisis. Between 1980 and 1984 dry bulk trade only grew by 1% pa. Investors had punted on a coal trade boom as power stations switched from oil to coal. Steam coal trade did grow, but iron ore and coking coal trade declined. Since 2010 it’s been a better story thanks to China’s endless infrastructure boom. Dry bulk trade has grown 5.7% pa and in 2014 was 40% higher than in 2009.
Hire My Car, Dude
The second big difference is interest rates. Between 1980 and 1984, 6-month LIBOR averaged a crippling 13%. At the end of 1984 it was still over 11%, so an owner who ordered a $20m Panamax in 1981 and borrowed 80% would be looking for around $1.7m pa to pay the interest. But the $6,000/day TC rate only generated around $2.2m pa, of which $1-1.5m would be needed for OPEX. It’s different today with LIBOR at 0.33%. Interest on today’s Panamax ordered for around $25m in 2012 is $66,000/year, or $180/day. Less than hiring a Mercedes S Class, which costs $280/day in London.
The third big difference is history. In 1985 the bulk market had three years of disastrous earnings behind it. At $5-6,000/day the $280/day Mercedes was long gone and balance sheets were bare. In this recession it’s a less harrowing story. Earnings since 2010 are 80% higher than 1980-1984, with a nice top-up mini boom in 2014 and affordable interest.
Hopefully Half Way
So there you have it. Good trade growth, slow steaming, and rock bottom interest rates have helped make this recession more manageable for shipping investors playing the counter cyclical ordering game. As a result, asset prices are way above the 1985 level when that $25m Panamax would have been lucky to attract a $6m bid. But the shipyards are still there; and the world economy is very unsettled. So it’s not the 1980s, it’s a whole new ballgame. Have a nice day.