Dry bulk shipping weekly analysis (Part 11: New build prices)

Market Realist

Continued from Part 10

Why new ship prices (values) matter

As we discussed in Part 10, ship prices reflect the current and future fundamentals of the shipping industry’s supply and demand balance. When market participants expect shipping rates to rise, shipping companies place more orders with ship construction companies, which drives prices for new ships higher. Apart from 15-year-old ship prices, it’s also important to track new build prices because they reflect the longer-term outlook of the dry bulk shipping industry’s fundamentals. This is because managers won’t pursue aggressive new purchases if they believe the short-term increase in rates won’t last.

(Read more: Dry bulk capacity growth slows further, encouraging sign for later half of 2013)

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Dry Bulk New Builds 2013-08-11

June’s Capesize vessel prices followed May’s jump

Based on the latest information available from Simpson Spence & Young, the world’s largest independent shipbroking group, prices for new-build Capesize vessels (the largest class of ships that mainly haul iron ore and coal across the ocean) in China stood at $47 million in June. This figure is unchanged from May but still follows a significant jump from $43 million per vessel in April. Ship prices have been falling since 2009, driven by the expectation of lower shipping rates due to large new orders. But the record increase in May, which sustained in June, shows managers have begun to purchase new ships in anticipation of higher Capesize shipping rates, along with a recovery in ship orders (see Part 2) and tighter supply and demand balance in the future.

(Read more: Supramax price rises first time since mid 2010, signs of shipping recovery)

Capesize vessels could outperform

Although prices for other ships (Panamax and Handymax or Supramax classes) are also showing turnarounds, they appear weaker compared to the gain we saw in Capesize prices. So this may indicate that companies with the largest exposure to Capesize vessels will perform better over the long run, likely driven by higher iron ore shipments as we’ve discussed in Part 7 and Part 8, as well as tighter supply additions. While this is positive for all dry bulk shipping companies—such as Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), Navios Maritime Partners LP (NMM), Knightsbridge Tankers Ltd. (VLCCF), and DryShips Inc. (DRYS)—Knightsbridge Tankers Ltd. (VLCCF), with only Capesize vessels in its portfolio of ships, will benefit most.

(Read more: Why the Baltic Dry Index has decoupled from the Chinese market)

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