Its spring and with tanker and dry bulk rates showing a hint of improvement, what could be more natural than buying a few ships? Maybe not too many, since most investors suspect that that there is still a long cold winter ahead, but you have to keep moving and today the numbers are looking a bit more manageable.
Invaluable Assets
The great thing about shipping is that as long as the investment is "good value", it's a long term game. As the 2000s showed, value does come back eventually, sometimes on a very exciting scale, but it can be a long wait. So, for anyone with capital, the real issue is whether the assets are good value - the proverbial cheap ship. One way to benchmark this is to track the cost of a second-hand ship compared with replacement cost, or as a proxy, the cost of the new building. This can be done by dividing the price of, say, a 5 year old vessel by its replacement cost, i.e. the cost of a new building. The two are not quite comparable because the second-hand ship arrives immediately, whilst the new building is not delivered for a couple of years. But, this approach shows whether the current second-hand prices make sense.
Depreciation Deal
Since 1990 the ratio of the 5 year old to new price for a bundle of tankers and bulkers has been 82%. In economic terms that makes sense. It says a new ship loses 20% of its value during the first five years i.e. 4% per annum or full depreciation over 25 years). Over the same period the average scrapping age of tankers and bulkers was 26 years, which fits. So, with todays index at 75.5% (see graph), second-hand prices are at a discount to the 20 year average.
Dodgy Data?
The index has only dipped below 75% three times in 20 years. In December 2008 it fell briefly to 70%; in January 1999 it fell to 74%; and in November 1995 when it fell to 73%. The good news is that it only stayed there for a couple of months. The bad news is that in 1991 it fell to 52% and stayed there two years.
The ratio does depend on both prices. In a declining market, new prices often lag second-hand. For example, since December 2009 a Panamax bulker new price has fallen 19%, but the second-hand price is down 39%. So, the new price could have a way to go. How far will depend on shipyard break even, currency exchange, competitiveness, subsidy and credit; none easy to predict. But three years into the downturn it is a fair bet that the better yards are at best hovering around breakeven.
Keeping Active
So there you have it. Today, second-hand prices look pretty realistic, when benchmarked against new building prices. But, like all the best gambling decisions, there is a downside, which could see them cut another 20 points. Of course, values are likely to rebound but, with so much shipyard capacity around, it could take an awful long time. But then in shipping, patience is the ultimate virtue. Have a nice day.