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?
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.
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!