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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 Crowe
23 May 2014
Price indicators can tell market-watchers many things. In the volatile shipping markets they can provide a helpf ul window on both the health of todays markets and expectations of
f uture conditions. In the case of the latter, they may not be correct but its always 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 when owners have the expectation of one, the
price of a 5-year-old ship should theoretically be about 75-80% of the price of
the newbuilding, ref lecting that merchant ships have a 20-25 year economic lif e
and depreciate accordingly, other things being equal. The Graph of the Week
shows the 5 year old to newbuild price ratio f or a Capesize bulkcarrier, a VLCC
tanker and a 2750 TEU containership f or the last 10 years.
Bulk Better, Box Bottom
Well, todays 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 with 1% growth expected in 2014, but VLCC f leet
expansion is projected to be sub-2% this year, so thats a better balance than
f or a while. On the dry side the Capesize price ratio (which once hit 160% as
owners 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, with
sentiment seemingly f airly positive, Capesize f leet growth expected to slow to
4% in 2014 and iron ore trade expansion projected to motor on at 10% this year.
The ratio f or the 2750 TEU containership is much lower, standing at 51%, almost
as low as the 44% seen in 2009 (though its higher in some of the larger
boxship sizes). Given the size of the surplus generated by the 9% downturn in
trade in 2009, the box sector remains a bit f urther behind the curve than the bulk
sectors. And here the dif f erence in potential f uel ef f iciency between new
designs and older ships is starker, pressuring the secondhand asset price
f urther.
Downturn Downtime
So the ratios today seemf airly well aligned with market perceptions. But how have they f ared since the onset of the downturn? 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 worse.
Was It So Bad?
The downturns in the 1970s and 1980s were f ar harsher on asset prices. In the late 1970s the ratio f or both a Panamax bulker and f or an Af ramax tanker dipped as low as 40%.
Interest rates were much higher, and the banks were much quicker to f oreclose on distressed assets. This time, despite the slump in 2008, the price ratios havent suf f ered so
dramatically (in the bulk markets at least) and investor appetite remains. However, part of that is a ref lection of todays expectations and time will tell how well investors have f orecast
f uture market developments. Have a nice day.
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