Purchase prices for ships are often good indicators of financial health in the shipping industry. When shipping demand is growing more than the supply of ships, shipping companies will place additional orders, which drives up purchase prices. Additionally when firms are able to charge higher prices for transporting goods across the ocean, this allows them to generate higher gross margins and returns, increasing the value of ships themselves.
On December 31st of 2012, the prices for 15 year old Panamax and Supramax fell to $8 and $7 million respectively. Panamax and Supramax ships are mid-sized and smaller vessels that are used to transport dry raw materials such as iron ore, coal and grains over the ocean. Older ships tend to be more sensitive to the changing health of the shipping industry, while newer ships are more resilient. When the market is robust, firms prefer to provide extra maintenance for old ships to prolong their lives, rather than to purchase new ones, as new vessels can take two to three years to construct. On the other hand, old ships are the first to be retired when orders are being completed due to their relative inefficiencies.
Continued decline in Panamax and Supramax purchase prices since 2010 reflects the on-going excess capacity in the dry bulk shipping industry. This is occurring due to the record number of ship orders that were placed before the financial crisis, when managers became too optimistic with China’s trade growth (see “Falling bulk carrier orderbook marks progression” for ship order trend). Investors can use ship orders and utilization to project the future outlook of the dry bulk shipping industry. As long as ship rental rates continue to fall, the outlook appears negative for dry bulk shipping companies such as DryShips, Inc. (DRYS), Diana Shipping, Inc. (DSX) and Eagle Bulk Shipping (EGLE), as well as the Guggenheim Shipping ETF (SEA) that invests in leading shipping companies world-wide.
For the most up to date information available on Panamax and Supramax purchase prices, please visit our Collateral Value Key Driver section.
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