Where will newbuild prices go in the next 18 months?

Where will newbuild prices go in the next 18 months?

Most analysts tell chief correspondent Jason Jiang that shipyards should be able to push through further price increases soon. Chinese shipyard reopenings remain the fly in the ointment however.

Where will newbuild prices go through to next year? It’s one of shipping’s perennial $64bn questions. Get it right, and you could be reading the shipping cycle perfectly. Get it wrong and you could be out of business. In an ongoing poll for Splash, roughly four-fifths of readers think newbuild prices will continue to rise over the coming 18 months, although by how much is keenly debated.

Newbuilding prices have been on an upward trajectory over the last 12 months, driven by the interplay between a rising orderbook, shipyard consolidation, rising dry bulk freight rates and a hike in construction costs. Despite the volatile factors in the newbuilding market, most analysts contacted by Splash believe newbuilding prices in most ship segments will continue to rise over the next year.

A useful barometer to keep an eye out for where newbuild prices are at is by checking the Clarksons Newbuilding Price Index, which currently stands at 128 points, up by three points since the start of the year. The index uses the prices from January 1988 as its base at 100 points and for useful comparison over the last 10 years the index has soared to above 190 points (almost exactly 10 years ago to the day) and hit a low of around 120 points in late 2016.

Despite more orders pouring in, margins are still tight for shipyards, as witnessed by the failed attempt from Korean shipbuilders this week to get domesic steel mills to freeze their ship plate prices.

“Although we don’t expect to see much further upward pressure exerted by steel plate prices, which have already risen by around three quarters since the start of 2016, a further weakening in the US dollar will give an additional uplift to costs over the course of the next 18 months,” says Dr Adam Kent, managing director of Maritime Strategies International.

Kent believes that not only will the pricing floor see further escalation but a return to persistent contracting, across a raft of sectors, will progressively switch the pricing power firmly back to the shipyards.

“The ultimate result will be that newbuilding prices will rise by an average of 10% by the end of next year,” Kent predicts, a point of view shared with 22% of Splash voters to date.

Ralph Leszczynski, head of research at shipbroking house Banchero Costa, reckons there is still a lot of overcapacity in the shipbuilding sector which will keep a cap on prices.

“I think a lot of the recent bullishness has already been priced in, and I don’t think there is that much upside potential at the moment,” says Leszczynski.

Nevertheless, Leszczynski estimates that VLCC prices could rise further from the current $88m to around $92m to $94m over the next 18 months, but they’re unlikely to get back to the $100m touched in 2014, while the price for capesize bulkers could further increase to around $50m-$52m from the current price of $48m during the same period.

Despite the promising outlook in the newbuild bulker and crude tanker market, the newbuild market for product tankers is a very different scenario.

The latest product tanker asset values report by Affinity shows that product tanker assets are historically cheap and Affinity estimates that newbuilding prices will hold low and flat throughout 2018.

“In real terms, newbuilding prices are at their lowest in at least a generation. In nominal terms, they are at their lowest since 2003. If secondhand values are more discounted than historically normal against these low levels, that has to represent value. There is a high demand for building MRs. This trend has been observed by traditional VLCC shipyards that have shifted into building smaller product tankers,” Affinity says in the report.

According to VesselsValue, the enthusiasm for newbuild orders across most shipping segments has started to wane in the second quarter, after a total of $10bn was committed on newbuilds in the first quarter of this year.

The total newbuilding order value declined sharply to some $3.5bn in the second quarter. In the meantime, the total committed to new deliveries is now at the lowest since the start of 2016.
Among all vessel segments, bulker newbuild orders has seen the most significant growth so far this year with 119 vessels ordered, compared with 65 vessels ordered in the same period of last year.

Court Smith, an analyst at VesselsValue, has noticed that shipyards continue to come under pressure from their creditors not to discount newbuild prices in order to secure business.

“The unwillingness to accept loss-making projects is contributing to the rationalisation of shipyard capacity. Fewer yards building ships means fewer slots available to owners, which in turn supports prices,” Smith says.

“All markets are seeing an uptick regardless of the underlying earnings in each, suggesting structural reduction in capacity is pushing prices upwards,” Smith maintains.

In Smith’s view, newbuilding prices could increase by 10-15% over the next few years, however any more significant increase would be met with a return of additional construction capacity, which would push prices back downwards.

“The headwinds to global trade may give some owners pause in fleet renewal plans, especially in the container and dry bulk markets which would be directly impacted by the higher prices for consumer goods which would result from tariffs. However, most shipping markets appear to be at their trough level or improving, which should encourage more investor interest in newbuilds going forward. The shift in money being committed to the ships is a good reminder that the cyclical nature of the business remains intact,” Smith concludes.

The cause for concern is China and recent Splash news that Chinese yards are reopening.

As of last week data from VesselsValue shows so far in 2018, 143 individual Chinese yards have delivered vessels, a marked increase over the 108 Chinese yards who delivered ships throughout the whole of last year.

Dr Roar Adland, shipping chair professor at the Norwegian School of Economics, tells Splash that the fact yards are reopening is a sign that the markets are working as they should. He does predict however that the news from China will likely keep a lid on newbuild prices in the long run.

China holding the whiphand in shipyard capacity clouds the the newbuild price debate for sure.

Where do you think newbuild prices will go in the next 18 months? Take part in our poll by clicking here.

Jason Jiang

Jason worked for a number of logistics firms following his English degree, then switched this hands-on experience to writing and has since become one the most prolific writers on the diverse China logistics industry writing for a host of titles including Supply Chain Asia, Cargo Facts and Air Cargo Week. Jason’s access to the biggest shippers with business in China has proved an invaluable source of exclusives.

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