Another milestone in the history of ocean shipping has been reached. Another industry indicator that is lighting green is the number of boats exchanged in the first half of this year, which was more than any other six-month period.
It isn’t simply container ships that are at risk. In addition, a large number of tankers and bulkers were sold. Ship asset values have continued to climb across the board, not only in container and dry cargo transportation, where freight rates are high, but also in tanker shipping, where freight rates are low.
The greater the increase in ship prices, the greater the shipowner’s net asset value (NAV, the market-adjusted value of the fleet and other assets, minus liabilities). Theoretically, the higher the NAV, the higher the stock price.
“The stellar S&P [sale and purchase] market achieved ‘top marks,’ with all-time record transactions of more than 85 million DWT [deadweight tons], up 131 percent on H1 2020 and 31 percent on H2 2020, and more than double the long-term trend,” according to Steve Gordon, managing director of Clarksons Research.
“Around 8% of the fleet will change hands in 2021 at current rate,” Gordon predicted.
“A frenzy of activity,” according to Stifel analyst Ben Nolan, who added that the “true rise” in investment is in S&P acquisitions rather than newbuild orders. “Normally, roughly 1,200 large oceangoing ships are bought and sold every year,” Nolan added, “but we’ve already hit that number in 2021.”
Container Industry
In the months of January to June, 301 container ships with a total capacity of 1,025,000 twenty-foot equivalent units (TEUs) changed hands, according to Alphaliner. “This is the largest TEU quantity ever bought and sold in a six-month period,” the company stated.
In the first half, Mediterranean Shipping Co. (MSC) led the charge, purchasing 53 ships totaling 185,590 TEUs. Since August, it has purchased 72 ships totaling 289,950 TEUs in “an extraordinary buying spree,” according to Alphaliner.
(Alphaliner was used to create the charts.) The Alphaliner platform has all of the details.)
The higher the ships’ profits will be, the more susceptible they are to increasing freight charges. Carriers can boost their near-term exposure in one of two ways: chartering ships or purchasing them used.
Due to a dearth of available tonnage, chartering activity has halted, according to Alphaliner. The scarcity “may be here to stay, altering the charter market’s face.” ” Non-operating owners (NOOs), or businesses that charter ships to lines, have been placing their ships on multiyear charters, according to Alphaliner, “meaning that a large section of the NOO fleet will not be available in the charter market for years to come.”
Because there are fewer charterable ships, carriers must purchase boats secondhand in order to increase their near-term exposure to freight rates. Simultaneously, NOOs that have already chartered out their existing fleet are trying to purchase additional vessels to charter to liners.
This dynamic should add even more fuel to the S&P market’s fire. Alphaliner noted that container ship values “had been rising from April onwards,” noting that a 1,700-TEU ship was sold for $21.5 million in June, more than treble what this kind of ship fetched in January.
According to Gordon, the Clarksons index, which gauges the value of used container ships, increased by 124% in the first half of the year.
Sector of Tankers
Given the sky-high freight rates, frantic S&P activity and surging asset prices make perfect sense in container shipping. But why are sales and values increasing in the tanker sector, where rates are “apocalypse-level awful,” as Nolan described it?
In the first half, Allied Shipbroking stated that 278 tankers totaling 33.2 million DWT changed hands. COVID lockdowns pushed last year’s numbers downward. Looking ahead to the more usual year of 2019, tanker sales in the first half of this year were treble those in the first half of last year in terms of DWT.
Ships are divested amid dropping asset prices by distressed sellers having to raise cash and stay afloat when freight markets collapse, as they did after the financial crisis. That is not the case in the present tanker-rate downturn. Despite the fact that practically all tankers in service are losing money, tanker values are rising.
Since the start of the year, Clarksons’ secondhand tanker value index has increased by 12%. Tanker CEOs present at a recent Marine Money Week virtual event claimed that, depending on the type of tanker, values had risen by up to 25% from lows in late 2020.
“I don’t think I’ve ever seen anything like this before, where rates have been so low for so long and rates have stayed in there,” said Ridgebury Tankers CEO Bob Burke during the Marine Money Week event.
Several factors, according to Burke, contributed to the disconnect. “One is that people are able to hold the line because their balance sheets have staying strength from last year’s festivities [when tanker rates were extraordinarily high].” Another difference is that this is not like previous cycles, when there had a large orderbook to work through. This time, we believe that charter rates will rise again in the not-too-distant future.” To put it another way, there’s no urgency to be a seller, therefore those who do sell do so only at a premium to current freight rates.
Tanker values are being boosted by outside forces, according to Christian Walgrave, director of research and commercial performance at Teekay Tankers (NYSE: TNK). “Newbuild prices have risen as steel prices have risen and container ships have absorbed yard capacity.” This is exerting increasing pressure on the [secondhand] modern end of the spectrum.”
Higher steel prices are also helping to support the value of older tankers. “Scrap prices have reached a 10-year high,” Walgrave remarked. He also mentioned that older ships in “sanctioned transactions” are in high demand. Owners that are ready to take the risk of transporting Venezuelan and Iranian oil are paid more, justifying higher prices for older tonnage that would otherwise be scrapped.
Sector of Dry Bulk
In the first half, 532 bulkers totaling 37.4 million DWT changed hands, according to Allied Shipbroking. This is a 143 percent increase over the amount of tonnage sold in the first half of this year.
Since the start of the year, Clarksons’ secondhand bulker value index has increased by 38%.
Strong freight rates, which are at 10-year highs for medium- and smaller-size bulkers, are supporting increased bulker sales activity and valuations, unlike in the tanker market.
Dry bulk also confronts more newbuild constraints than other segments, resulting in increased buyer demand in used tonnage.
For starters, steel input costs account for a bigger share of the entire cost of a bulker than they do for more sophisticated vessel types. Second, yards earn bigger profit margins on container ships, LNG carriers, and tankers than on bulkers. Third, because the cost of installing dual-fuel systems accounts for a bigger amount of the overall newbuild cost, bulkers are more difficult to “future proof” against yet-to-be-written decarbonization requirements than other ships.
“As orders for new bulk carriers have been restrained, the secondhand market has been exceptionally hot,” according to Braemar ACM Shipbroking. Bulkers, particularly older tonnage, have seen significant increases in secondhand prices. As owners use this option to refresh fleets and engage in the strong spot market, we expect activity to stay hot in the coming months.”
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Pixabay image by Julius Silver
One of our external writers wrote the previous article.
It has not been modified and does not represent Benzinga’s perspective./n
