Archives for posts with tag: secondhand prices

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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Well, summer’s here and shipping investors are heading for the sun and a bit of relaxation. It’s halfway through the year, so it’s also a chance to reflect on the last six months, and maybe speculate a little about the next. But to enjoy this diverting task, you need the right sort of drink and we think Greta Gronholm’s cocktail My Green Summer (MGS), voted IBA cocktail of the year in 2013, might be just the thing.

Shaken And Stirred

The shipping cocktail in the chart has three ingredients – a bland but pleasantly oily world economy, fruity freight rates, with an intrusive hint of bad bulker, and cool prices. Give it a good shake and you can drink it but you’d be much better off sticking to Greta’s award winning brew.

Economy – Bland With Attitude

My Green Summer is based on the economical Martini Prosecco, a suitably affordable fizz to toast OECD industry whose growth rate halved to less than 2% pa in the first half of 2015. China is a worry, with imports down 7%, as the steel industry finally peaked out, and there are concerns about its $28 trillion debt problem, a real estate bubble and the stock market. But My Green Summer spices things up with a dollop of exclusive Grey Goose La Poire vodka. Luckily oil prices, down 46% since last year, are doing the same thing for the economic cocktail. Cheap oil is sweetening up world oil demand, and the IEA in June revised its demand forecast up to 1.4 million bpd growth in 2015, a helpful 1.5% increase.

Revenue Tasty By Tart

On the earnings front, the last six months was surprisingly flavoursome. My Green Summer adds Routin 1883 Green Apple, Routin 1883 Passionfruit, and a touch of Call Premium Lime juice. You can taste all these fruity flavours in the market, with oil tanker earnings up 110%, gas carriers up 26%, and (a bit sharper) containerships up 36%. With most segments doing better in the first half-year, the Clarksea Index was up by 29%. But whoever mixed the cocktail wasn’t paying attention. Although tanker rates were historically strong, boxships are still struggling to cover depreciation and the miserable dry bulk performance, with average earnings of only $6,500/day is leaving drinkers with an very unpleasant aftertaste.

Asset Prices Cucumber Cool

The final ingredient of My Green Summer is a slug of Le Sirop de Monin Cucumber, which pretty well describes asset prices – cool. Bulker prices dropped 34% as investors, after the euphoria of 18 months ago, cooled to the prospect of an imminent market recovery, concluding there’s too much capacity everywhere. Meanwhile, secondhand prices for crude tankers have risen year-on-year bur product tanker prices have fallen away on the same basis. Meanwhile the shipyards are discounting prices, especially for the bigger ships.

Not Really An Award Winner?

So there you have it. A fizzy world economy, shaken up with a dash of cheap oil; some fruity tanker earnings, a large slug of bulker bitters all shaken with a measure of Le Sirop de Sluggish Sentiment. It’s not really a classic cocktail is it? Have a nice day.

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