We’re not sure if you can buy a ship on Alibaba, but the way merchant ships get traded is one of the shipping industry’s most distinctive features. These assets fluctuate wildly in value, providing shipping investors with a unique opportunity to take a flutter in terms which consign most other gamblers to the little league.

Astonishing Volatility

Since 1985 the published price assessment for a 5 year old Panamax bulker has fluctuated between extremes of $5.5m and $92m. Few assets in the global economy offer this sort of extreme pricing, in a liquid market. Of course these extremes are now part of shipping folklore and they don’t happen every day. But it leaves shipping searching for turning points and wondering whether today’s prices are a good or bad deal.

Three Sources Of Asset Value

Lots of factors determine the price of a 5 year old ship, but three stand out. The anchor is the newbuild price which can set the ceiling. But the new ship is not ready for a couple of years, so the price also includes an assessment of short-term earnings. Also the newbuild price may include a discount or premium, depending on the market. So there’s an element of market sentiment on both sides of the equation.

Old Ships Versus New

The graph plots the price of a 5 year old ship as a percentage of the newbuild price over 25 years from 1990. The average comes to 80% for the Aframax tanker and 86% for the Panamax bulker, which with all other things being equal implies an expected life of 25 years for the tanker and 31 years for the bulker, reflected in the generally higher age at which Panamaxes have been scrapped. The tanker and bulker prices follow different cycles. In 2008 the tanker index stood at around 100%, so the 5 year old ship cost the same as a newbuilding. But the 5 year old Panamax price shot up to $89m, compared with a newbuild price of $55m, giving a ratio of 162%. So the market expected the ship to earn $34m by the time the newbuilding had been delivered. A difficult premium to justify and strongly influenced by market sentiment.

Cheap Bulkers, Dearer Tankers

Today the opposite is happening, though on a more modest scale. This time it was the bulker index which fell from 80% in June 2014 to 69% in August 2015, below the historical average of 86%. Meanwhile the tanker index rose from 67% to 87%, above the historical average of 80%.

Gambling On The Margins

So there you have it. This really is a highly volatile and big ticket market. However the long-term trends show that, like in all good casinos, the odds pretty much average out in the end. So maybe the message is that today’s tanker values have now edged above the historical trend, whilst bulkcarrier prices have moved in the other direction and are looking decent long-term value on the basis of this kind of analysis. Of course in the end it’s a matter of finding the right ship and the money to buy it. You could try Alibaba, but a shipbroker would be a safer choice. Have a nice day.

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