Looking at the ratio between newbuild and secondhand prices is a classic method of examining the state of various shipping sectors. But the metrics can be just as revealing at the older end of the market. Trends in the ratio between scrap values and secondhand prices for elderly vessels can shine further light on the health of the shipping markets, and can also have implications for fleet dynamics.
Particularly stark signs of the current ill health of the key shipping sectors are apparent in the market dynamics for older units. With global steel prices determining ship scrap values (effectively the ‘floor’ for elderly secondhand vessel prices), the ratio of prices for older ships to estimated scrap values varies in line with market conditions. When markets are weak, investors may attribute little premium to the short-term earnings potential of elderly vessels, and secondhand prices for these ships can fall close to the scrap value.
On Life Support?
In the bulker sector, the ratio between assessments of 15 year old prices and scrap values has fluctuated dramatically. At end August 2016, amidst a depressed earnings environment, the price for a 15 year old Capesize stood at $8.0m, only 1.3 times the estimated Capesize scrap value of $6.2m, with the 20 year old price close to scrap value. These ratios have fallen in recent years as the market outlook has deteriorated, but even a 15 year old/scrap price ratio of over 2.0 in mid-2014 was a far cry from 2005-08 when 15 year old Capesize prices averaged more than 5 times scrap value, with ‘boom’ bulker earnings inflating asset values.
A similar trend has emerged in the containership sector. With charter rates largely in the doldrums since start 2012, the 15 year old price for a 2,000 TEU boxship has remained close to scrap value. Particular stress is also evident in the ‘old Panamax’ sector, with the price for a 15 year old 4,400 TEU ship now assessed at $5m, in line with estimated scrap values. In contrast, ratios in the tanker sector have generally risen in recent years. The 15 year old VLCC price was 3.5 times scrap value in early 2016, up from 1.3 times in early 2015. However, the ratio has recently dropped in line with weaker tanker earnings.
Elders On The Edge
As well as illustrating market trends, these ratios also influence fleet developments. Weaker markets and lower price ratios typically lead to more ships being scrapped rather than sold secondhand, as the ‘market mechanism’ helps to reduce oversupply. Across the bulker and containership sectors, over 70% of transactions of vessels 15+ years old since start 2012 have been accounted for by demolition sales, compared to just 11% in 2005-07. Increasingly young vessels are also being scrapped as a result.
So, price ratios for older units can prove a useful indicator of the state of the markets. For assets generally expected to have a lifespan of 25 years or more, the historically low ratios of even 15 year old vessel prices to scrap values in some sectors is a clear and sobering reminder of the challenges still being faced.