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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.
Panamax stabilizing, Handymax/Supramax rising
During the last month of February, the average price for a 15 year old Handymax/Supramax vessel increased from $7.0 million dollars a vessel to $8.5 million dollars, representing an enormous jump of 21.4%. At the same time, the average price for a 15 year old Panamax vessel, which is larger than Supramax, stood unchanged at $8 million dollars. Ship values have declined since 2008 as oversupply of ships increased competition among firms, pressured shipping price, and overall profitability.
Eagle Bulk Shipping Inc. benefiting the most
The second straight month showing an increase in Handymax/Supramax vessel price since mid 2010 suggests higher day rates (shipping price) ahead as demand from countries such as China and Japan is expected to drive higher imports this year due to infrastructure investments. This is extremely positive for Eagle Bulk Shipping Inc. (EGLE) because the company focuses on Supramax vessels with 43 Supramax and 2 Handymax ships at the end of December 2011.
Panamax focused companies likely to follow
Nonetheless, a rise in Supramax vessel price indicates possible appreciation in Panamax vessel price over the next few months because vessel prices have historically moved together in the same direction over the medium to long term. If Panamax vessel prices do rise, companies that focus on Panamax vessels, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), and Safe Bulkers Inc. (SB) will benefit. This will also be positive for the Guggenheim Shipping ETF (SEA), which invests in large shipping companies worldwide, because ~42% of industry revenue comes from dry bulk shipping, and Panamax and Handymax/ Supramax vessels together make up more than 50% of dry bulk ships.
© 2013 Market Realist, Inc.