Archives for posts with tag: Sales & Purchase

From one viewpoint, given the huge range of companies involved, the ownership of the world fleet can look quite fragmented. But from another, the prominence of larger owners who account for the majority of tonnage is quite clear too. Upon closer inspection however, some sectors appear proportionally more likely to be home to the bigger, more diversified players than others.

For the full version of this article, please go to Shipping Intelligence Network.

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Since the 2H 2014 offshore downturn, when investment in new exploration and development dried up, many offshore vessel owners will have tended to agree with the child heroine of the 1976 musical Annie: “It’s a hard knock life”. However after three years of setbacks and weak markets, some are now starting to see positives, as a few indicators show encouraging signs. But does that mean it’s time to invest?

For the full version of this article, please go to Shipping Intelligence Network.

One year ago we reported that it looked like container shipping was “at last starting to build towards something more positive” and that “2016 may well be seen as the year in which the container shipping sector really started to tackle its problems head on.” One year later, it looks like 2017 lived up to at least some of the expectations, with improved market conditions clearly visible.

 

For the full version of this article, please go to Shipping Intelligence Network.

At this time of year, icy conditions are not uncommon, but the warmth of the festive season is usually enough to melt even the coldest of hearts. Going into this year, shipping market activity might have still felt pretty iced up for many, but increased activity in a number of core areas in 2017 has seen the shipping market temperature rise a little…

For the full version of this article, please go to Shipping Intelligence Network.

 

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.

Health Check

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.

Looking Poorly?

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.

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Some readers may remember Spike, the punk Dracula who became famous in the unlikely role of villain and hero in the 1990s TV series Buffy the Vampire Slayer. Although Spike had no actual connection with shipping, he enjoyed torturing people with a railroad spike, which at least makes him part of the transport business. And since the shipping business abounds with spikes, there’s a natural connection.

The Price Spike Saga

In fact the latest in a series of interesting and extreme price spikes is going on in the shipping market today. The graph shows the price of a 5 year old Aframax tanker divided by the price of a 5 year old Panamax bulkcarrier. The value of this ratio at the end of June 2015 was 265%, the second highest level on record. To put that in perspective, the average since 1976 has been 146% (the dotted line). The lowest value was 70% in February 1981 and until April this year the highest value was 267% in June 2001. Any time a market produces this sort of extreme spike, it’s worth taking a close look at what’s driving it, to see if there’s a potential opportunity lurking in the background.

Sharp Opportunity

The first noteworthy observation is that today’s spike appeared very quickly. Eighteen months ago, in January 2014, the ratio was only 126%, below the long-term average. But since then the price of the Aframax tanker has shot up by 32% and the Panamax bulker price has slumped by 37%. These major adjustments were driven by freight rate trends, reinforced by grim sentiment in the bulker market and a revival of interest in tankers. Could this be the moment to buy a bulker? Let’s see how previous spikes developed.

Looking back, the last two spikes were in 2006 and 2008. The 2006 spike was triggered by the boom tanker market of 2004-05. At the same time investors thought the bulker market had probably peaked out. But a 5 year old Panamax bought for $29m in January 2006 was a super deal, and would have sold for more than twice as much a couple of years later. The spike in November 2008, just after the onset of the credit crisis, saw a 5 year old Panamax cost $26m. This was a strange time with little liquidity, but on paper the ship would have sold at a premium of more than 30% in 2010.

Extreme Point In Time

But the ‘mega-spike’ in June 2001 was the real winner. Trigger happy investors who had ordered cheap new Panamaxes in 1999 were taking delivery into a lousy market, and the price of a 5 year old ship slumped to $14m. This turned out to be a real bargain. Just over six years later the 11 year old ship would have sold for over $60m, having traded through the great boom market, earning around $40 million (after OPEX). That’s $100m revenue on less than $15m investment.

For Fear Of Vampires

So there you have it. Spikes terrorise shipping investors, but often it’s a case of “no pain, no gain”. Only the vampire slayers, like good old Buffy, and a handful of intrepid shipowners have the courage to seize the day. But history also tells us that Spike’s appearances are short and sharp. Have a nice day.

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