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The shipping industry has long provided investors with opportunities for asset play, reflecting the volatility in prices and relative shifts in the value of certain classes or ages of ships. Recent months have been no exception, with changes in tempo clearly evident in some shipping sectors. What can conducting a quick survey of the classic asset market indicators tell us today?

Classical Repertoire

One classic indicator (see SIW 1175) of the state of the asset market in any particular sector is the ratio of the 5 year old price to the newbuild price of a similar ship. On the basis of a 25 year lifespan, a 5 year old vessel depreciating evenly would be worth around 80% of the newbuild price. The level of this ratio can demonstrate how keen investors are to purchase assets on the water today.

Change Of Tempo

The graph shows the 5 year old to newbuild price ratio for a Capesize and a VLCC. The ratio is clearly volatile, and recent trends in the Capesize sector are illustrative of how conditions in shipping asset markets can change rapidly. Since the start of 2009, the Capesize ratio has fluctuated within a wide range from 50% (reached in early 2009 and again in early 2016) to 110% (although this was still well below the peak of 160% in mid-2008 at the height of the boom). The ratio has also moved significantly even in the last few weeks, as Capesize secondhand prices have risen robustly. At the end of February 2017, the 5 year old Capesize price stood at $25m, 60% of the newbuild price. By the end of March, the 5 year old price had risen to $33.5m, 80% of the newbuild price and the highest ratio since autumn 2014, indicating the improved appetite for tonnage in the bulker market.

New World Or Old Classics?

While these trends in asset price ratios can indicate the market’s view on the relative value of newbuild and secondhand tonnage, changes in the ratio can sometimes subsequently impact on decision making by investors. When the ratio falls to low levels (the Capesize ratio remained below 70% from Jan-15 to Feb-17), secondhand purchases can often appear more attractive than newbuildings, whilst higher ratios can sometimes eventually stimulate newbuild interest.

Orchestrating Opportunities

Even more starkly, the volatility in price ratios reinforces the opportunities for asset play in the shipping markets. To take an example, a 5 year old Capesize vessel one year ago could have been picked up for about $23.75m. Trading the vessel on a 1-year timecharter (around $8,000/day at the time) and selling the unit as a 6 year old, for say $31.5m, would have generated a return of almost $8m after OPEX (34% of the original outlay).

Still Making Overtures?

So, even after a prolonged downturn, the classic indicators show a shipping market still volatile and open for asset play. Recent shifts, especially in the bulker sector, offer an excellent example. Whilst the outcome is always highly difficult to predict, there still appear to be opportunities for those willing to take a chance, hoping to hit the right note. Have a nice day!

SIW1267:Graph of the Week

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.