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Why you shouldn't be afraid of dry bulk shipping industry pullback

Part 6
Why you shouldn't be afraid of dry bulk shipping industry pullback (Part 6 of 6)

Why a ship vessel price jump in August signals dry bulk recovery

Why should you watch ship purchase prices?

Purchase prices for ships are often good indicators of financial health in the shipping industry. When shipping demand grows more than the supply of ships, shipping companies place additional orders, which drives up purchase prices. Plus, when firms are able to charge higher prices for transporting goods across the ocean, profitability rises, and so does the value of ships.

Dry Bulk 5 Year Old Sales and Purchases 2013-09-09Enlarge Graph

Five-year-old vessel prices jump

In August, the price tag of five-year-old Capesize vessels sold in the secondary market jumped to $32.6 million from $31.4 million at the end of July, based on data pulled from RS Platou’s Monthly Report. This is the first time that the sales price of Capesize vessels has risen this much in a while. The increase reflects the fact that Capesize rates have been soaring lately on the back of increased iron ore imports from Australia and Brazil.

Seeing that rates were rising rapidly, buyers are becoming more optimistic and are willing to pay more for those secondhand vessels. At the same time, sellers are unlikely to be willing to sell these vessels if they have the cash flow to support them, which reduces supply. Both these factors are driving ship prices up. Higher prices for 15-year-old ships and new builds from another source, Simpson Spence & Young, had pointed to higher rates as well.

Dry Bulk New Building Prices 2013-09-09Enlarge Graph

New build vessel prices also rose

New build prices also rose, increasing by $0.5 million. The larger increase in five-year-old ship price means that shipping companies are expecting rates to rise faster than construction firms can make new ships. Shipping company CEOs have recently said that good shipyards are mostly booked until 2016. So if any shipper right now wants to place orders for new ships, it will have to seek out yards with higher expenses and possibly less credibility, or wait for ships to be delivered in 2016 and beyond.

Prices for older vessels reflect nearer-term supply and demand dynamics than they do for new build prices. This is because shipping companies can purchase these secondhand vessels immediately and use them right away, whereas managers that tend to place orders for new vessels usually think of the much longer-term trend.

Baltic Shipping Index by Ship Class 2013-09-09Enlarge Graph

Rising vessel prices suggest ongoing dry bulk recovery

The increases we’ve seen in five-year-old ships and new-build Capesize vessels are positive signs that Capesize rates are to rise from current levels in the near term as well as the long term. Historically, rising ship prices have suggested higher rates ahead. August’s data was positive for Capesize prices. Prices for five-year-old Panamax vessels didn’t increase as much, which suggests there’s still some weakness in the outlook of Panamax rates. Nonetheless, with supply expected to come down, Panamax prices should also rise in the coming months. As long as these ship prices continue to move higher, dry bulk shipping companies such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), Navios Maritime Partners LP (NMM), and Navios Maritime Holdings Inc. (NM) should benefit. Check back later this week for demand-side fundamentals.

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