Prices for Vessels

Alexander Romanenko - Central Marine Research & Design Institute

The shift of world prices for vessels will never lose its importance for the whole marine industry. This topic was discussed in our magazine last year (Maritime Market, issue № 2(8), №3(9), 2004), and we are going to address it once again upon requests of our readers in order to highlight the recent changes. The facts and figures used in our review are predominantly originating from the reports of companies P.S. Platou, Clarksons, Gibson, Poten & Partners, and the editions of Fairplay.

  Movement of world price for ship construction








  Changes of the world's volume
  of contracts for ship construction









  Movement of world price for SH-ships








  Newbuilding Prices vs Second Hand Values

Quo Vadis?

The contract prices at the world shipbuilding market have been continuously growing during the last 2.5 years, starting from late 2002. The prices for newbuilding have reached an unprecedented peak and have become a difficult barrier for many potential clients. More and more shipping companies have to refrain from placing new orders and postpone modernization of the fleet, expecting a price decline. However, no one can say when this decline happens: there is still a lack of credible signs for radical changes in this ascending movement. The oil market can serve an example of the sphere where everybody expects a crack-up because of the soaring oil prices; however, despite these common expectations, no crucial changes have taken place until recently.

The price growth continues in 2005 for all types and kinds of marine vessels, and the greatest growth affected large tonnage vessels – tankers, bulkers, container carriers, gas carriers, ro-ro vessels, etc. The demand for large vessels has risen at the highest, because large vessels provide for large volumes of cargo transportation on transatlantic routes. These are the main working horses in the international marine trade.

In early 2003 a VLCC tanker of about 300,000 DWT cost approximately $70 mil., while in 2005 its contract price was over $120 mil. And in April this year, a new record was set: a Lebanese ship-owner ordered 3 VLCCs at Daewoo shipyards for $390 mil., i.e. at the average cost of $130 mil. This deal was reflected in many marine editions. It was noted that the contract had been secured by a long-term charter in Saudi Arabia, which would repay the extraordinarily high costs incurred by the ship-owner.

However, on the whole, the inflow of orders for tankers like that has slowed down. Some experts have expressed their concern on this occasion. According to E.A.Gibson, it is necessary to construct about 30 VLCCs annually within the period of 2005-2010 in order to phase-out single-hull tankers in accordance with MARPOL requirements. This condition holds true in 2005-2007; however, the number of orders for the following period is insufficient. In addition to high prices, the case is complicated by the lack of suitable dry docks at the premises of the main builder of VLCC – South Korea, the more so that these are assigned for more profitable contracts from Quatar, which intends to place an order for a whole fleet of large gas carriers with South Korean shipyards.

The world prices for bulkers are also mercilessly growing (see Table 1). Starting from early this year they have increased by 7 to 10%, depending on the class of the vessel, compared to the last year prices by 25-35%. Similarly, container carriers of various capacities are becoming more expensive.



Why do the prices for newbuilding grow?

The level of prices in shipbuilding is rising due to a combination of factors, although the main role is played by the extremely favorable situation at the marine charter market and the dramatic situation in the shipbuilding industry. The key factor is that the Asian shipyard facilities work at their maximum capacity, the prices for steel and accessory equipment are high, and the dollar exchange rate is lower in relation to the Japanese, Korean and European currencies. The storm that burst in the shipbuilding world in the middle of 2005 is followed by a relatively calm period. The order portfolios of the main world shipbuilding centers in Asia have been filled up, as has never been before, and this situation is likely to remain for a long period of time until 2008. 89% of the whole order volume falls to the share of three leading countries. South Korea is the leader in the production of tankers, Japan is the leading producer of bulk carriers and ro-ros, and China constructs general cargo ships. On the whole, within the expired period of 2005, new contracts have tended to be shifting to China where the prices for new tonnage are lower than those in Japan and South Korea. Companies from Japan, Germany, Greece and China have ordered the greatest number of ships.

The shipbuilding boom has brought to life some not-so-competitive European shipyards which have started to receive new orders due to large workload of Asian shipbuilding corporations. Some shipyards which had suffered bankruptcies and were standing idle, have been re-animated recently. The prices in Europe for newbuilding are considerably higher, however, the orders are accepted for shorter periods: 2006 and 2007, which often determines the choice of clients. More active involvement of «expensive» European shipyards in the world production of vessels is conducive to higher average price levels.

Not only Chinese shipbuilding gained power amid the general boom: the shipyards from East Europe, Vietnam, Turkey, Indonesia and other countries which had been recently almost unnoticeable at the shipbuilding market have put themselves forward.

Incidentally, major shipping companies like Hyundai, Daewoo, Samsung, Mitsui currently feel depressed despite their enormous turnover. Their management is desperate, according to Fairplay, because the profitability of shipbuilding contracts concluded far in 2003 is practically has been brought down to zero due to the unforeseeable increase in prices for steel and equipment.

Probably, they will never recover from losses by the end of this year, and only in 2006 they will be able to restore their former status. All their efforts are directed to shortening the time of building, and they become deeply involved in cooperation with small and medium shipyards.

South Korean companies currently develop new technologies due to the lack of dry docks for placing new orders. However, related companies engaged in shipbuilding machinery have been lagging behind the shipyards which are booked to capacity, and there is a problem of dramatic lack of main ship engines. Despite the efforts, the supplier companies fail to provide shipyards with required products, which makes some shipyards postpone the time for commissioning almost completed vessels. The prices for engines, electrical generators and other machinery, hull plating and various accessory items, have grown considerably. This factor, among others, has continued pushing the prices for newbuilding up to new peaks.



Table 1
Newbuilding Prices in mill $

Class

2001*

2002*

2003*

2004*

2005
(April)

Tankers
VLCC
Suezmax
Aframax
MR

 
70
46
36
26

 
64
44
34
26

 
77
53
43
31

 
110
70
60
40

 
125
74
64
43

Bulkers
Capesize
Panamax
Handymax

 
37
20
19

 
35
21
18

 
43
25
21

 
60
35
29

 
64
39
31

*according to Fearnley’s and P.S.Platou information on Eastern Asia shipyards



Is it cheaper to buy or to build?

The galloping prices for second-hand ships continue to set up new records, achieving the historical maximum. In our last year review (Maritime Market, 2004, №3) we drew attention to a new phenomenon at the sale and purchase market: the value of second hand ships which have served a number of years sometimes was higher than that of the similar vessels in the contracts for newbuilding. This has become a wide-spread tendency.

If a ship-owner ordered construction of a new Capesize bulker at an Asian shipyard in May 2005, the contract price for that was approximately $68 mil. But if he wanted to buy one at a secondary market, which was not older than 5 years, the purchase cost 6% more: $72 mill. The gap in prices can be clearly seen in bulkers of a Panamax class: a second hand vessel will be 15% more expensive than a newly built one ($46 mil. and $40 mil. accordingly).

As is known, there is a close dependence between the dynamics of prices for new and second hand vessels. This can be illustrated by the diagram below. It shows the movement of prices for tankers of Aframax class, recently published by the well-known broker company Poten & Partners. As is seen in the diagram, the both graphic curves changed synchronously and, starting from 2003, came close to each other and became almost equal in late 2004 – early 2005.

The market for second hand ships in the first and the second quarters of 2005 remained unusually active. Vessels of different types changed hands often after delivery, with great and even fabulous profitability for sellers. For example, the Alvina bulker of 73.6 mil. tons deadweight, built in China in 2004 under a $19.5 mil. contract (the order was made in 2002), was sold to another owner in April 2005 for $52.5 mil. In this case the value of the vessel that has served to one owner less than a year increased 2.7 times. Basically, vessels are resold with 20-30% extra charge after a brief operation period. The deals like that do not present a surprise to anybody any longer.

The demand of shipping companies for second hand bulker tonnage is particularly high. About a hundred dry cargo ships are sold each month at the secondary market at record prices. By May 2005, compared to the respective period of 2003, the price for large-tonnage bulkers of Capesize class of various age groups has increased two- and three-fold, in particular: for vessels aged 5 years – from $29 to 72 mil.; for vessels aged 10 years – from $22 to 55 mil.; for vessels aged 20 years – from $7 to 21 mil. The price for a five-year-old Panamax grew up to $46 mil., i.e. it increased by 30% within 2004, and by 150% starting from early 2003.

Among the second hand tankers of various classes even more old vessels have become expensive, notwithstanding how strange it may seem. For example, a Suezmaх aged 20 years has increased in price 2.4 times: its cost rose up to $20.0 mil. against $8.3 mil. in early 2003, while a ten-years old Suezmaх tanker has risen in price 2.9 times, and a 5-year old one 2.2 times.

Re-sale of various types of vessels often takes place at the stage of unfinished construction. A sequence of three 3,450 TEU container carriers ordered at the Hanjin shipyard last year at $50 mil. for each vessel to be delivered in 2006-2007, has recently been resold in full to other ship-owners at a new price of $60 mil.



What then?

The situation at marine markets can change in the nearest future under the influence of both demand and supply. The demand for transport capacities is determined by macroeconomic factors, and the future development of world economy does not inspire optimism. The recent report On the Perspectives of World Economy, published by the International Monetary Fund in April 2005, predicts that the economy growth rates for most industrial countries will slow down in 2005 and in 2006, compared to the last year (2004). These are not very good news for marine trade or the related charter markets. High prices for fuel cannot help, negatively affecting the economies of importing states. The moving speed of the leading economies of USA and China - will play the title role. These two countries devour the most of the imported raw materials and fuel, attracting powerful cargo flows from everywhere. It should be noted that more that a half of world imports of iron ore and ѕ of power station coal falls to the share of China. In the 1st quarter of 2005, the Chinese consumers exclusively covered two thirds of the increase in the world bulk transportation of iron ore. The production of steel in the country has increased by 25%, while in the other part of the world the increase was by 1% only. Beijing has failed to hold the national economy within the planned frame of 8% annual increase, but the fear that it may get overheated, make the authorities act more assertively.

Even if no drastic changes happen to the party which requires vessels, the growth rates of the world marine trade will remain lower than the rates of replenishing the fleet. The charter markets will be inundated by the gigantic fleet which is now being built at the shipyards throughout the world. There is a reason to forebode that increased deliveries of vessels will prevail over the market supply and will deteriorate the charter market situation. In particular, according to the estimate made by the British company Clarksons, the orders for container vessels have currently amounted to 49% of the operating fleet, and they even amount to 93% among the vessels above 4,000 TEU. A large number of the ordered Panamax tankers may seem superfluous; they amount to 55% of the total operating fleet. The world bulker fleet has started expanding at the fastest rate for the last two decades.

The imbalance can be diminished by intensive scrapping of old vessels, although there is currently dull season at the scrap market. The operation of even most obsolete cargo vessels continues at high charter rates; while very few vessels have been sent to cutting in 2004-2005, dry cargo vessels in particular. There were months where very few contracts for the sale of bulkers were concluded, or there were no such contracts at all. Only 0.4 mil. tons of bulker capacities and combined capacities were sold for scrap in the first quarter of 2005; however, even in the 4th quarter of 2004 this figure was 1.1 mil. tons of deadweight. As a result of a long period of stagnation, the prices for cutting scrap in South Asia are also extraordinarily high. Last April the tanker of 35,000 tons deadweight built in 1976 was sold to India for $425 LDT, and another one was sold to Bangladesh for $428 per LDT. However, even this level of prices seems to be an insufficient incentive for ship-owners.

The shipping business is currently in the period of «golden age» throughout the world. The Big Three shipping companies of Japan (Mitsui OSK Lines, K-Line and NYK) have reported their financial returns for the year ended in March: the fiscal year has been completed with the biggest revenue ever received. Earlier major ship-owners of various countries reported about their record achievements in 2004 one after another, not excluding the leading Russian companies.

No one has ever complained of the current charter market situation. The bulker market is feverish now; however, the range of rates stay at a very high level. In the first months of 2005, the average charter rates for various classes of vessels was 3 to 6 times higher than those at the end of 2002 – beginning of 2003. The rates for container carriers, depending on the tonnage, were 2 to 4 times higher compared to that respective period.

We do not have the whole information for May 2005 at the moment of publishing this issue; however, the results available for April can be alarming for ship-owners: the charter figures for tankers and dry cargo vessels have plummeted, and time-charter rates for all classes of bulkers appeared to be the lowest for this year. The reduction of charter activity was most conspicuous at the market of tankers where the rates for double-hull VLCCs, having soared up astronomically in October-December 2004, then rushed down to lower levels. Unlike the 4th quarter of the last year, when the rates exceeded the highest limits at a number of important transatlantic oil transportation routes (above 200-220,000 USD/day), they did not exceed 50-55,000 USD/day at the end of April 2005, and lowered down to 32-48,000 USD/day in May. If the situation does not stabilize in the summer, the ailing charter market will pull down the demand and the prices for vessels. Then the question is if the ship-owners would like to use the decline in prices for their benefit.

Go to Index of # 2(12) 2005

 

# 2(12), 2005
Shipping