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5/25/2014 Market - Clarksons Shipping Intelligence Network
http://www.clarksons.net/sin2010/markets/Feature.aspx?news_id=35400 1/1
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Markets > Features > What Does It Tell You If The Price Is “Right”?
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What Does It Tell You If The Price Is “Right”?
by Mr Trevor Crow e
23 May 2014
Price indicators can tell market-w atchers many things. In the volatile shipping markets they can provide a helpful w indow on both the health of today’s markets and expectations of
future conditions. In the case of the latter, they may not be correct but it’s alw ays interesting to take a look. So, how do price indicators help us gauge the state of play?
The Price Is Right?
In a “normal” market, or at least w hen ow ners have the expectation of one, the
price of a 5-year-old ship should theoretically be about 75-80% of the price of
the new building, reflecting that merchant ships have a 20-25 year economic life
and depreciate accordingly, other things being equal. The Graph of the Week
show s the 5 year old to new build price ratio for a Capesize bulkcarrier, a VLCC
tanker and a 2750 TEU containership for the last 10 years.
Bulk Better, Box Bottom
Well, today’s VLCC price ratio is right on the 75% mark, having dropped as low
as 58% in late 2011. What does that tell us about expectations? Crude oil trade
is a mature business w ith 1% grow th expected in 2014, but VLCC fleet
expansion is projected to be sub-2% this year, so that’s a better balance than
for a w hile. On the dry side the Capesize price ratio (w hich once hit 160% as
ow ners sought to get their hands on tonnage at the height of the boom) is
f lourishing at 90%. That might be a good representation of expectations, w ith
sentiment seemingly fairly positive, Capesize f leet grow th expected to slow to
4% in 2014 and iron ore trade expansion projected to motor on at 10% this year.
The ratio for the 2750 TEU containership is much low er, standing at 51%, almost
as low as the 44% seen in 2009 (though it’s higher in some of the larger
boxship sizes). Given the size of the surplus generated by the 9% dow nturn in
trade in 2009, the box sector remains a bit further behind the curve than the bulk
sectors. And here the difference in potential fuel eff iciency betw een new
designs and older ships is starker, pressuring the secondhand asset price
further.
Downturn Downtime
So the ratios today seem fairly w ell aligned w ith market perceptions. But how have they fared since the onset of the dow nturn? Since September 2008, the Capesize ratio has spent
just 33% of the time below the 75% line. The VLCC ratio has spent 65% of the time below 75% but only 29% of the time below 65%. So, in those sectors the impact on asset pricing
could have been w orse.
Was It So Bad?
The dow nturns in the 1970s and 1980s w ere far harsher on asset prices. In the late 1970s the ratio for both a Panamax bulker and for an Aframax tanker dipped as low as 40%.
Interest rates w ere much higher, and the banks w ere much quicker to foreclose on “distressed” assets. This time, despite the slump in 2008, the price ratios haven’t suffered so
dramatically (in the bulk markets at least) and investor appetite remains. How ever, part of that is a reflection of today’s expectations and time w ill tell how w ell investors have forecast
future market developments. Have a nice day.
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