Archives for posts with tag: investors

Price ratios are a classic indicator used in a range of industries where assets depreciate over time. In the shipping sector, they can often tell us something about the perceived health of the market, and in particular about what investors are really willing to outlay to get their hands on assets that are on the water today compared to investing in a new vessel.

A Classic Ratio

One classic shipping market indicator is the ratio of the 5 year old price of a ship to the newbuild price of a similar vessel. On the basis of a 25 year lifespan, a 5 year old ship, depreciating on an even basis, would be worth around 80% of the newbuild price. However, if investors feel that the market is strong enough, they may be willing to pay a premium to get their hands on a secondhand vessel to operate in the market today. Conversely, if the earnings environment looks weak, investors may take a more negative view of the value of the existing asset.

The graph shows the 5yo/Newbuild price ratio for a VLCC tanker, a Panamax bulkcarrier and a 2750 TEU containership over time. Immediately apparent is that during the boom shipping market of the mid to late 2000s, the featured ratios stood well above the 80% line, and at times above 100% for all three vessel types, with the Panamax bulker ratio as high as 170% in late 2007. Since the downturn in 2008, the ratios have fallen. From one angle, it could have been worse; there was a period when all three ratios exceeded 80% (Mar 10-Jun 11). However, in general the ratios have been depressed, and there have been clear phases (Oct 08-Mar 09, Aug 12-Apr 13) when they have all been below 80%.

Ups And Downs

So what do the ratios tell us today? Tanker earnings have had a strong run since late 2014 but even so the VLCC price ratio stands only a little above 80%, maybe indicating that investor positivity is mixed with caution. Meanwhile, the bulker market is in severe recession and the Panamax price ratio has fallen from 95% during 2014 to 65%, showing how investors’ optimism has drained.

Lower Levels

The containership ratio, however, is on the up, with earnings recently improved. But it still stands at just 54%, perhaps indicating investors’ caution and relative preference for new tonnage. At boxships’ higher speeds, the difference in fuel efficiency between new and older tonnage is more marked, though the ratio was higher in the 2010-11 period when fresh interest arose in a sector that ‘looked cheap’.
Reading The Classics

So, price ratios are classic indicators, and as if it needed emphasising, today’s ratios show that the shipping markets aren’t perceived by investors to be close to full health yet. Overall sale and purchase volumes in the year to date are a little way behind last year’s levels, and the price ratios today might give an indication as to investors’ actual feelings about assets on the water. But markets change quickly, so just like classic cars which get taken out once in a while, it’s the same for classic indicators – and market watchers should probably take another reading soon. Have a nice day.

SIW1175

Advertisements

In the last four months dry bulk orders have fallen to 0.4m dwt per month, the lowest level since the 1990s. This is a massive 98% reduction from the 23m dwt peak in orders in December 2007, and probably the sharpest decline in recent decades. Not really a surprise in a market where Capesize bulkers are struggling to earn $4,000/day, but a timely relief to investors with ships on the orderbook.

Investment Fever

This investment collapse marks the end of a remarkable phase of bulkcarrier history. During the last decade, 724m dwt of new bulkers have been ordered, around 70m dwt/year. Just to put that in perspective, during the previous decade ordering averaged about 20m dwt/year.

The 5 years from 1996 to 2001 were disappointing to investors, who ordered only 1.2m dwt/month. At the time this was seen as normal, and included a spike in 1999, when investors snapped up Panamax bulkers for $19-$22m. These were probably the most profitable bulkers ordered in the industry’s post-war history. Upon delivery they sailed straight into the bulk shipping boom. Proof that “crazy investors” are not always crazy.

Softly, Softly

The next phase from 2002 to November 2006 was quite restrained, considering the rise in freight rates. Ordering edged up, averaging 2.8m dwt/month. As earnings eased in 2006, many assumed the boom was over, but they were wrong and what happened next was unprecedented. As earnings escalated owners threw caution to the wind, and the big bulker cash machine drew investors from outside shipping. In December 2007, ordering peaked at 23m dwt, and in 2007 to 2014, investment averaged 6.8m dwt/month (81m dwt/year), an astonishing number for a period mostly in global recession.

Carry On Investing

Despite the onset of the global downturn in 2008, two more bulker investment spikes followed in 2010 and 2013. With surplus bulker capacity, and China’s growth engine easing off, it’s hard to explain this investment on strictly economic grounds. Easier, perhaps, to understand the change in expectations. The memory of spectacular bulker earnings had been fresh in the minds of some investors, but a decade later and that dream is fading.

The collapse in bulkcarrier investment is a particular problem for shipyards. Many builders in China and Japan surfed the wave of bulkcarrier investment and bulkers still account for around half of tonnage on order globally. In today’s sluggish world economy, that is going to be a difficult gap to fill. The fact that bulker prices are around 5% down this year, and ordering has virtually stopped tells its own story.

Big Bulker Investment Boom

So there you have it. The spectacular run of dry bulk investment which kicked off in early 2003 has finally ended. Then China’s imports were growing at 27% a year, a big difference from the 3% growth in 2014. This is disappointing, but as serious shipping investors know, in good markets and bad, there’s still an awful lot of cargo that has to be moved around the world – it’s just a matter of who moves it. Have a nice day.

SIW1170