Meister Eckhard, the 14th century German theologian, said that "the price of inaction is far greater than the cost of making a mistake". He was referring to spiritual matters, but when the same thought is applied to the shipping markets it's not such an easy decision. Senior shipowners usually have a few anecdotes illustrating the contrary belief of "act in haste, repent at leisure".
The Repetition of History
Anyone around in the early 1980s will remember the infamous Sanko orders. In 1982 dry rates had collapsed to $3,000/day and the ship-yards had far too much capacity. In just six months the price of a new 30,000dwt bulker slumped from $17.5m to $12.5m. Then news leaked out that Sanko Steamship Co. had quietly ordered 123 bulkers. These had the latest engines at a time when bunker costs were sky high and the logic seemed impeccable. Order a cheap ship today and take delivery in 1985, just as the market recovers. Better still, charter the newbuilding to Sanko. Other investors jumped on the bandwagon, and 1982-4 saw a dry bulk ordering bonanza.
But in shipping things are never quite as expected. By 1985 timecharter rates were still only $4,000/day and the new price was down 25% to $9.8m. Everyone in dry bulk was suffering and many of the timecharters which underpinned the deliveries failed.
What Happens Next?
Today the market is three years into another downturn. The Clarksea Index (average earnings of tankers, bulkers, containerships and gas ships) has slumped 75% to $11,000/day, the lowest since 2002 (see graph). Meanwhile the Newbuilding Index’s fall of 35% has taken a Panamax bulker from $55m to just $31m. But is $31m really the right price?
Plumbing the bottom?
In fact, today’s new price of, say, $31m for a Panamax bulker is still well above the 2002 price of around $20m. One reason may be that Korean $ costs have gone up by about 25% since then, so the "breakeven" price should be higher than in 2002. But that depends on who sets the pace on pricing. There are two issues here. Firstly, China now has more active capacity than Korea and in its core product range (bulk carriers and tankers) is probably in a position to push price competition very hard. But there are product areas where the Chinese yards are less competitive. Secondly, there is the question of whether, as the orderbook shrinks, the yards will be manoeuvred into pricing below cost (see analysis 985).
Feeling Spiritual about a Bulker?
So there you have it. 30 years ago investors jumped in and had the rug pulled out from under them. But that was 30 years ago. Today it's a simi-lar formula – shipyard overcapacity, combined with a wobbly world economy - but the management of this economic crisis is very different. No doubt many will enter into the spirit of Meister Eckhart's advice – but others may prefer to remember that great survivor Sanko. Have a nice day!