Mirror, mirror on the wall, which shipping sector is the fairest of them all? (Tonnage supply economics)

Looking forward, ahead of the present slump in shipping, the Captain is often inquired on the market segments that are in best shape, comparatively speaking, to fare bravely the market and the sectors that likely will recover first.  Hope springs eternal, as they say, and the present anemic freight market notwithstanding,   there are asset classes that are better positioned to weather the stormy markets.

Looking at vessel supply data, there is no question that, in general, the asset classes with the bigger sized vessels, whether tanker, dry bulk or containership, seem to be the most oversupplied.  For instance, according to the Captain’s logs, there are approximately 570 VLCCs in existence and about another 145 such vessels on order, so the outstanding orderbook is approximately 25% of the worldwide existing VLCC fleet.  There are almost 520 capesize vessels on order out of an existing fleet of 1,290 vessels (40% outstanding orderbook as percentage of the existing fleet), and 435 post-panamax containerships on order out of an existing population of 910 vessels (48% outstanding orderbook).  Sliding down the scale, panamax crude tankers have approximately 13% outstanding orderbook (53 vessels on order vs 410 on the water), MR tankers stand at about the same with 13% (175 vessels on order out of a worldwide fleet of 1290 vessles), handysize dry bulk vessels equal to 22% (with 670 on order out of an existing fleet of 3,035 vessels), handy containerships stand at only 8% (105 vessels on order vs 1,280 vessels in existence), and finally, stainless steel tankers bear 9% outstanding orderbook (95 vessels on order vs 1,050 vessels on the water.)  It is abundantly clear from the above data that the market for bigger vessels will be affected in the future more heavily by new vessels entering the market than the markets for smaller-sized vessels.

Looking to assessing future tonnage supply, besides the new deliveries that will enter the market, the age profile of the existing fleet, and thus the rate at which vessels are expected to leave the market, by way of demolition, etc, is also a very important factor.  The average VLCC is approximately 7.5 years old, and so is the average capsize vessel; for post-panamax containerhsips, due to the ‘new-ness’ of their design and market economics, the average vessel is only two years old.  However, the average MR tanker is already 12 years old, the average handysize dry bulk vessel about 16 years old, the average handy containership approximately 12 years old, and the average stainless steel tanker around 10 years old.  Again, the data make it abundantly clear that, in general, asset classes of big sized vessels consist of relatively young  fleets (as a result of persistent increased ordering and newbuilding activities during the booming years of the cycle), while smaller sized vessels are in general much older and, one might say, past their prime.

There is no question then that as far tonnage supply is concerned, VLCC, capsize dry bulk and post-containership vessels will likely have to face oversupplied markets for some time to come, and any demolitions will be limited and painful as these fleets consist of relatively modern tonnage.  There is always of course the question of tonnage demand, which can keep busy and absorb tonnage oversupplies, but again, vessel demand is at the mercy of direct market forces, and a subject profound enough to deserve its own discussion in subsequent posting.  

© Basil M Karatzas, 2011.  No parts of this blog can be reproduced in any way by any means under any circumstances without the prior written approval of the owner of the blog.  Copyright strictly enforced.

This blog is only intended for entertainment and discussion purposes; no responsibility can be assumed for taking or failing to take any action upon information contained in any part of this blog.

Should you desire to discuss contents of the blog or obtain commercial advise or opinion, please feel free to contact us at info@bmkaratzas.com.

Searching for the value of vessels in a thinly traded market (Part A)

Valuing vessels, like most other types of assets, would seem to be fairly straightforward:  a review of recent market transactions would more or less provide a very good guide of the value of a vessel.  This method is formally called the market comparable approach, or ‘last done’ in ship brokerage parlance, and it’s usually the number that gets stuck on the so-called desktop valuation certificate.   

Parenthetically, the valuation methodology extends to incorporate the replacement cost method (usually for unique type of vessels with minimal comparative guidance) and of course the income approach method based on the present value of the vessel’s earnings potential (there are variations on the theme of the income approach such as ‘charter-attached’ valuation based on actual employment contracted for the vessel, discounted cash flows (DCF), long term value or value based on the ‘Hamburg Rules’, etc.)

As a matter of industry practice, the charter-free, market comparable approach is typically utilized for documentation and collateral purposes in shipping loans, unless the lenders have financed a vessel / project based on an existing contract, revenue stream and their associated cash flows, and have agreed to accept valuations based on different methodology.  Therefore, deriving market based valuations is of paramount importance, especially at times like presently when asset prices have dropped significantly since the market topped and hovering perilously around the loan-to-value (LTV) covenant triggers.

As important as it is to have accurate market approach valuations, market conditions are not necessarily conducive to such noble aim.  For instance, for modern vessels including prompt resales, there is an extremely limited market.  While older vessels might still trade more frequently, comparatively speaking, and thus there is a better guidance on pricing, for new vessels, where incidentally the stakes are much higher, market guidance is extremely limited.  For example, as of middle October 2011, there are two transactions that took place for prompt resale VLCC year-to-date, one in January 2011 and the second in April 2011; that is, the freshest comparable transaction is already six months old, when all along, freight rates are demonstrably deteriorating and finance costs are getting patently more cumbersome.  To complicate matters more, both of the transactions took around the $105 million mark, which as strong price no doubt in retrospect as it may seem, at least it shows convergence to a concentrated price level.  However, in the first transaction, the banks privately forced the sale of the two vessels from a weak owner (whose equity  was completely wiped out from the sale) while the same banks extended 100% financing of the purchase price to the new buyer at, more or less,  the bank’s cost of funds.  In the second transaction in April, the buyer has a strong reputation for quality vessels, unrestrained access to the financial and capital markets and an operating profit business model in mind (as opposed to an asset play mentality).  However, strictly speaking, neither of these transactions fulfills the definition of fair market value (FMV), especially the part of willing seller and willing buyer neither under compulsion to act and with knowledge of all pertinent facts.    

So, how one values a prompt resale VLCC these days?

As recently as in September 2011, the Captain attempted to market for sale a prompt resale VLCC with approximately $95 million asking price, and some indicative offers received were in the $75 million range.  Is the price still at $105 million from April as ‘last done’, or the sellers’ asking price at $95 million, or the price from ‘bottom fishers’ at $75 million?  To spice things up, such a vessel has a $130 million cost basis, earns about $10,000 pd in the spot market at present, and based on standard financing assumptions, the daily bank note of interest and principal repayment would be close to $35,000 pd.

Figuring out the value of a prompt resale VLCC, or any other type of modern tonnage for that matter, in the present market! That is the question!

© Basil M Karatzas, 2011.  No parts of this blog can be reproduced in any way by any means under any circumstances without the prior written approval of the owner of the blog.  Copyright strictly enforced.

This blog is only intended for entertainment and discussion purposes; no responsibility can be assumed for taking or failing to take any action upon information contained in any part of this blog.

Should you desire to discuss contents of the blog or obtain commercial advise or opinion, please feel free to contact us at info@bmkaratzas.com.