Older vessel prices are another indicator that reflects shipping companies’ fundamentals. Because these vessels are sold and bought in the secondary market, it doesn’t take as long for the buyer to receive these vessels. So changes in price for older vessels often reflect a nearer-term fundamental outlook, and they tend to move ahead of new builds.
When the prices of second-hand ships rise, you can expect shipping companies to benefit over the short to medium term. But when prices are falling, expect shipping companies to perform poorly.
October results
In October, second-hand values continued to rise for both Capesize and Panamax vessels. Ten-year-old prices for Capesize vessels rose $1 million, from $26 million to $27 million, while Panamax ships saw a larger increase of $1.5 million, from $16.5 million to $18 million. These increases have been larger than the increases (in percentage terms) we’ve seen for new builds, reflecting managers’ assessment that shipping rates will rise faster than expected and the fact they’re paying a premium to receive these second-hand vessels right away.
Advantages
Unlike new builds, the value of a second-hand vessel more depends on the short-to-medium-term outlook. With second-hand vessels, the buyer focuses more on what rates will be over the next one to two years, rather than what they will be over the long term. This makes ten-year-old vessels a valuable tool to assess what the dry bulk shipping industry’s fundamentals may mean over the next few months and quarters, which sometimes causes this set of indicators to move ahead of new build prices.
Disadvantages
There are drawbacks, however. From 2009 to 2011, for example, ten-year-old vessel prices climbed overall. Yet, if you look back at the previous article, you’ll notice that new build prices didn’t rise much. When they did rise, the increase was short-lived. Since second-hand vessels depend more on short-to-medium-term fundamentals, they don’t necessarily reflect the long-term outlook.
As the share prices of a stock depend on expected future cash flow, which varies from as short as one week to two to three years into the future, the long-term outlook is still very relevant. A poor long-term outlook was the main reason dry bulk shippers and several other shipping companies underperformed the market throughout those periods.
New build and second-hand prices
But as we’re now seeing new build and ten-year-old vessels both rise in the same direction, investors can expect dry bulk shipping companies and shipping ETFs like Diana Shipping Inc. (DSX), Navios Maritime Holdings Inc. (NM), Navios Maritime Partners LP (NMM), Safe Bulkers Inc. (SB), and the Guggenheim Shipping ETF (SEA) to generate positive returns over the short, medium, and long terms.
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