Monday, 28 May 2012

Investors eye second hand vessel market

Even as shipping companies struggle to stay in the black, it appears that investors sitting on piles of cash are looking to buy cheap, good quality ships. Their numbers seem to have increased with the recent sectoral firming up of freight rates, although analysts warn that it is too soon to say whether the market has bottom out long term.  Worrying numbers out of the US and Europe and the continuing Greek fiasco will take time to play out, they warn; the threat of a double dip recession in parts of the developed world cannot be ruled out.

Nonetheless, there is some good news for ship-owners out there. For example, container shipping has seen a revival of sorts, with some predicting that the recovery will be well underway by early next year. Operating margins have improved considerably- freight rates on some routes have risen threefold- giving a much-needed breather to a segment that lost a reported US$ 6 billion in price wars last year. Stakeholders will continue to support the industry if this trend continues, says Alphaliner, the liner shipping experts. The stability- short lived or not- is what is encouraging investors to purchase vessels.

"If you're in the market for new buildings as well as second-hand vessels, this is the time to buy. Prices are low and demand is soft," Vice Chairman of Evergreen Marine Corp (Malaysia) Ooi Lean Hin said in an interview recently.  "If you understand the shipping market, now is the best time to buy. That's because when the market picks up, you have a higher potential to enjoy asset appreciation," he added. 

With traditional lenders chary of financing asset purchase, investors are stepping in to fill the gap. Unlike earlier recessions, though, they are mindful of the fact that fuel and environmental costs will play a big role in the economics of ship operations and are therefore looking for quality second hand vessels. Unfortunately, there is a paucity of those in the market. London based Clarkson's- the leading brokerage house- says that investor's would "willingly snap up a significant number of cheap, good quality ships if they could only get their hands on them". Although the first four and a half months of 2012 has seen 425 ships worth $5.5 billion being sold, Clarkson's says, "a re-delivery VLCC is a very different commodity from a 20-year-old vessel on the verge of being scrapped". 

Only one modern VLCC has come up for sale in 2012, it points out, with two thirds of the tankers sold anywhere between six and ten years old. A similar situation exists in the dry cargo segment.
Industry observers are confident that investors will keep on looking for good ships in the second hand market. Or even new ones- a new VLCC now costs 40% less than in 2008 and a new container vessel around 30% less. While some ship-owners are keen to get rid of old vessels, the issue seems to be more the availability of good quality vessels up for resale, with ship-owners in no hurry those. 

Clarkson's says that the cash squeeze, three years into the recession, is "still mild", and pressure on owners from banks or other lenders has reduced, with many taking a "wait and see" attitude as long as loan interest costs are covered. 

"In previous recessions, cheap prices were generally triggered by an inability to pay loan interest. Forcing ships onto the market resulting in distress sales just makes matters worse for their other loans. But this recession has been different for two reasons. First, freight rates have only touched “rock bottom” for short periods, interspersed by spells of fairly robust earnings. Second, interest costs are at a record low, which makes life easier for the banks," it says.

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