Some readers may remember Spike, the punk Dracula who became famous in the unlikely role of villain and hero in the 1990s TV series Buffy the Vampire Slayer. Although Spike had no actual connection with shipping, he enjoyed torturing people with a railroad spike, which at least makes him part of the transport business. And since the shipping business abounds with spikes, there’s a natural connection.

The Price Spike Saga

In fact the latest in a series of interesting and extreme price spikes is going on in the shipping market today. The graph shows the price of a 5 year old Aframax tanker divided by the price of a 5 year old Panamax bulkcarrier. The value of this ratio at the end of June 2015 was 265%, the second highest level on record. To put that in perspective, the average since 1976 has been 146% (the dotted line). The lowest value was 70% in February 1981 and until April this year the highest value was 267% in June 2001. Any time a market produces this sort of extreme spike, it’s worth taking a close look at what’s driving it, to see if there’s a potential opportunity lurking in the background.

Sharp Opportunity

The first noteworthy observation is that today’s spike appeared very quickly. Eighteen months ago, in January 2014, the ratio was only 126%, below the long-term average. But since then the price of the Aframax tanker has shot up by 32% and the Panamax bulker price has slumped by 37%. These major adjustments were driven by freight rate trends, reinforced by grim sentiment in the bulker market and a revival of interest in tankers. Could this be the moment to buy a bulker? Let’s see how previous spikes developed.

Looking back, the last two spikes were in 2006 and 2008. The 2006 spike was triggered by the boom tanker market of 2004-05. At the same time investors thought the bulker market had probably peaked out. But a 5 year old Panamax bought for $29m in January 2006 was a super deal, and would have sold for more than twice as much a couple of years later. The spike in November 2008, just after the onset of the credit crisis, saw a 5 year old Panamax cost $26m. This was a strange time with little liquidity, but on paper the ship would have sold at a premium of more than 30% in 2010.

Extreme Point In Time

But the ‘mega-spike’ in June 2001 was the real winner. Trigger happy investors who had ordered cheap new Panamaxes in 1999 were taking delivery into a lousy market, and the price of a 5 year old ship slumped to $14m. This turned out to be a real bargain. Just over six years later the 11 year old ship would have sold for over $60m, having traded through the great boom market, earning around $40 million (after OPEX). That’s $100m revenue on less than $15m investment.

For Fear Of Vampires

So there you have it. Spikes terrorise shipping investors, but often it’s a case of “no pain, no gain”. Only the vampire slayers, like good old Buffy, and a handful of intrepid shipowners have the courage to seize the day. But history also tells us that Spike’s appearances are short and sharp. Have a nice day.

SIW1178

Advertisements