Ships' secondhand values may face structural headwinds
In a recent bi-annual report, Danish Ship Finance provided some very useful insight to the future prospects of the global shipping industry. Among the issues discussed, was that of second hand vessels market. According to Danish Ship Finance (DSF), few ship types, in any segment, have an age profile that can address the risk of stagnating trade volumes through regular demolition of older vessels. DSF also noted that premature scrapping and lay-ups of vessels seem almost inevitable if future demand fails to improve the balance between supply and demand.
According to the report, most ship segments, if not all, are positioned for continued growth in transport volumes. Still, we argue that some improvements in freight rates may be achieved through systematic premature scrapping until the point where a new balance between supply and demand has been established. This mechanism seems to be the industry s only option to transform equity into cash gradually without impacting the value of the younger vessels any more than the low freight rate market is .
DSF went on to analyze the current state of the shipbuilding industry noting that it is in the midst of an adjustment process. The industry is consolidating rapidly, as relatively low order covers are putting downward pressure on newbuilding prices. Some yards are strengthening their positions, while a large and growing number of yards are unable to attract new orders and are struggling to stay in business. In total, yards representing around 20% of global capacity are currently expected to run out of orders within a year. Most of these yards are Chinese. By year-end 2016, Chinese yards will have delivered 74% of their current orders. Therefore, we expect the Shipbuilding industry to be in for a bumpy ride in the coming years. By the end of 2017, we predict that the number of active newbuilding yards could be reduced to around 200, down from around 900 yards five years ago. If that is the case, global yard capacity will decline to roughly 42 million cgt (a 20-25% reduction from current levels) within the next few years. We expect newbuilding prices to remain under pressure for the foreseeable future .
Meanwhile, in the dry bulk market freight rates remain near historically low levels, with oversupply still rather significant. As a result, ship owners have postponed or even cancelled orders and demolished older vessels, DSF said that the above process has contributed towards keeping the fleet growth in check, limiting it to 2%, during the first nine months of 2015, while according to year-end projections, the total growth was expected to end up by around 4%. According to DSF, the rebalancing of the Chinese economy has, however, reduced growth in Dry Bulk demand to a modest 1%. This is the lowest demand growth seen since 1999, aside from the post-financial crisis figure of 2009. The short-term outlook is clouded by an orderbook-to-fleet ratio of 17% and the ongoing rebalancing of the Chinese economy. In the short term, the rebalancing effort is expected to lower Dry Bulk demand further, since the heavy investments in construction and infrastructure have lost steam. Freight rates and secondhand values are expected to remain at low levels for the next two to three years. The medium- to long-term outlook is shrouded in uncertainty, since the long-term demand outlook for fossil fuels is being threatened by the astonishing technological progress being made within solar, wind and energy efficiency and the improved ability to store the energy for later use (e.g. batteries). Fossil fuels will remain a major source of energy for at least a few decades, but a more efficient use of energy and the potential for new technologies to decarbonise the energy supply will reduce the medium- to long-term demand outlook for coal. The long-term outlook for steel and other building materials seems relatively promising in light of the expected urbanisation process, not just in China but in most emerging countries. In short, Dry Bulk vessels may experience a reduction in transport volumes in the short term before volumes stabilise at a lower level , the report concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide