Why dry bulk indicators suggest a positive outlook for investors

Part 3
Why dry bulk indicators suggest a positive outlook for investors (Part 3 of 8)

Why dry bulk companies saw 5-year and 10-year ship prices rise

Second-hand vessel values

Vessel values for five-year and 10-year Capesize vessels remained consistent at $48 million and $36.5 million. Panamax vessel values for five-year-old and 10-year-old vessels declined to $25 million and $19 million from $26 million and $20 million, respectively. Meanwhile, Handymax vessels also decreased to $25 million and $19.5 million in July 2014 from $26 million and $20.5 million, respectively.

Bulk 5 yearsEnlarge Graph

The difference compared to newbuilds

Led by quicker deliveries, price movements for secondhand vessels tend to reflect industry participants’ expectations for medium-term fundamentals, unlike what they do for newbuilds, for which buyers and sellers have to wait for about two years for delivery. So this trend suggests that secondhand vessel prices tend to be more responsive to changes in current rates.

Since buyers and sellers are more medium-term thinkers, they’re more responsive to industry turnarounds compared to newbuilds. Although this only takes about one or two months, share prices can move fast within a small period.

Bulk 10 YearsEnlarge Graph

Vessel price appreciation

You should consider that analysts use secondhand vessel prices to value dry bulk shipping companies like Diana Shipping Inc. (DSX), Knightsbridge Tankers Ltd. (VLCCF), Safe Bulkers Inc. (SB), and Navios Maritime Holdings Inc. (NM) in the stock market. If vessel values eventually come down because of over-optimistic expectations for rates, these stocks and the Guggenheim Shipping ETF (SEA) could be negatively affected.

The higher the value of these assets, the higher the value of a company’s assets. Changes to the value of a firm’s assets would also have a magnified impact on shareholders’ equity (the value of ownership in the company) after subtracting debt.

The Realist Discussions