Is now a good time to snap up cheap secondhand dry bulk tonnage? Jason Jiang investigates.
2016 could be another disappointing year for those who are waiting for the rebound of bulk shipping market. The outlook remains negative amid reduced demand for iron ore and coal from China and India, the main demand-driving countries for bulk cargoes. Consequently bulk carrier prices are also suffering pressure in both the newbuilding market and second hand market.
BIMCO anticipated 2016 to be the busiest year on record for shipbreaking of dry bulk vessels, with a capacity of 40m dwt to be sold for demolition, compared to 2015’s 30m dwt in total. However, 50m new dwt is also expected enter the world’s bulker fleet in the year.
“Bulker prices are at historic lows on an inflation adjusted basis, but fleet growth in recent years has outstripped cargo demand growth hence the low rates. We need to see either or both of a pick up in scrapping or an increase in cargo demand to lift equity returns in the dry bulk sector. We also need low newbuilding ordering,” says James Kidwell, chief executive of Braemar Shipping Services.
Assuming the shipowners and speculators have sufficient reserves and they do not want to invest in newbuildings to worsen the overcapacity situation in the bulk shipping market, would it be a good time now to purchase secondhand bulkers?
“Of course ships look ‘cheap’ compared to a few years ago and values did even tick up a bit earlier this year which can now probably be looked at as the bottom, but it’s plateaued since then and with earnings remaining horrific, there is not a lot of incentive to leap in,” says Tim Huxley from Hong Kong’s Mandarin Shipping.
Nevertheless, owners have leapt in to snap up huge amounts of tonnage this year. Statistics provided by online pricing vehicle VesselsValue.com show there’s been $3.51bn of action in the dry bulk S&P markets in the first eight months, similar to the $3.66bn concluded in the same period of 2015.
“With all the bad news around and possibly with some banks losing patience, there is an argument that prices could go down again,” Huxley warns, adding that he would rather like to get more clarity on key issues such as ballast water treatment implementation before make any investment decision.
Paul Slater, chairman of global financial consulting firm First International Corporation, agrees with Huxley’s opinions.
“I cannot see why anyone would want to buy bulk carriers today even at a deep discount to previous values. The charter income on most routes and cargoes does not even cover operating costs, let alone any debt interest,” Slater says.
Slater believes that the oversupply of ships will continue or even grow through this decade and into the first half of the next one, amid the reduced consumption of imported goods in the US and China showing little or no growth.
“The only sector that is worse off is the container sector which is in deep trouble as the giant ships are not full,” Slater says.
Khalid Hashim, managing director of Thailand’s Precious Shipping, reckons that investors could take advantages of the current low bulker prices to make a quick profit.
“One reason why you should be buying secondhand ships is the discount that you are getting compared to newbuild prices and all the associated angst of ordering new ships with the attendant increase in overall supply, so long as the gap between the depreciated price of a newbuild as compared to the actual market price of a secondhand five-year-old is materially positive,” Hashim says.
According to a report by Clarksons Platou, values of benchmark five-year-old and newbuilding handysize bulk carriers have reduced by about 2% and 5% since the start of the year to $9.3m and $19.5m respectively, and they appear to have stabilised. The significant gap between newbuilding and secondhand prices continues to discourage new ship ordering activity, which will benefit freight market fundamentals in the future. Cancelled or abandoned newbuildings especially from Chinese shipyards are occasionally marketed for sale by shipbuilders at significant discounts.
“With the BDI cautiously nosing it’s way back over 720 points and secondhand dry bulk prices having stabilized and some cases firmed up a bit, thoughts are understandably now turning to the idea of re-investment in buying vessels at what are still heavily discounted prices compared to 2014 and 2013.
The problem is that we have been here before. On previous occasions like the great white shark in Jaws the dry bulk recession has raced back to badly maul those unwary investors who had been foolish enough to venture back in the water,” says Martin Rowe, managing director Clarksons Platou Asia.
“A number of traditional shipfinance banks appear to have arrived at the conclusion that the dry bulk cycle is broken, which means that despite record low interest rates and a world awash with liquidity most owners who look to borrow so much as a dime to buy a secondhand ship will be given short shrift,” Rowe says.
“Not only is it a good time for the cash rich to buy secondhand ships but, it’s also probably a good time for those with only minimal cash reserves to take the plunge. There’s not much point in soldiering on with older vessels less suited to the task of the current market – better to pick up relatively modern vessels that can trade out the next couple of cycles and give a steadier longer term investment. The ship owner should still be in it to win it not just satisfied at still clinging on to life,” Rowe reckons.
“So time to pick up the dice and give them another roll,” the broker concludes.