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New build prices recover: Long-term positive for dry bulk stocks

Xun Yao Chen

Dry bulk shipping advice and updates, September 13–25 (Part 11 of 11)

(Continued from Part 10)

Why new ship prices (values) matter

When market participants expect shipping rates to rise, shipping companies will place more orders with ship construction companies, which drives prices for new ships higher. So, 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.

New build prices continue to recover

As the above chart shows, fluctuations in new build prices tend to be less volatile than the prices for 15-year-old ships. When prices for Supramax and Panamax 15-year-old ships rose significantly from 2009 to 2010, new build prices barely rose. 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 August—unchanged for four months now. Panamax vessels, on the other hand, saw an increase of $1 million in August. Supramax remained unchanged from May, at $25 million. This is unlike the trend we’ve seen in 15-year-old vessel prices for July and August.

Five-year-old ship prices confirm an uptrend

Five-year-old vessels are also showing some positive signs. Prices for Capesize ships rose from $33 million to $34 million in August, following an increase from $32.5 million in June. Prices for Panamax ships rose from $20.5 million to $21 million. The increase in five-year-old prices for Capesize ships likely reflects the fact that shipping companies expect rates for Capesize vessels to soar in the short to medium term and want to get into the action sooner rather than having to wait until new deliveries arrive in 2016 and beyond.

A past strong push in Capesize prices reflects current outperformance

The large jump we saw in the new-build Capesize price during May suggests a large increase in demand for the largest category of ships. This meant managers were expecting the supply and demand balance to tighten most. As we’ve seen lately, that has proven true, because Capesize vessels have been outperforming and are the main reason why the share prices of companies like DryShips Inc. (DRYS), Safe Bulkers Inc. (SB), Diana Shipping Inc. (DSX), and Navios Maritime Holdings Inc. (NM) have been rallying. As long as prices for new builds continue to rise, they should be positive for the long-term prospects of these shipping companies as well as Navios Maritime Partners LP (NM), which have contracts that mature more than five years from today.

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