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Dry bulk ship owners doing their “maths” before placing newbuilding orders

Friday, 29 June 2012 | 00:00
With oversupply having plagued the dry bulk shipping fleet since the end of 2011, it’s become ever so evident that placing a newbuilding order is a hard decision nowadays for most ship owners, despite the fact that newbuilding prices are close to their lowest price levels in two decades. Despite this incentive, ship owners have to consider additional factors, such as financing, market conditions and of course freight rates. If they are low, then it’s hard to consider a newbuilding order, since the return on investment will most likely be low, making it more difficult to secure and ultimately paying off a bank loan to finance the newbuilding investment.
In a recent report, Intermodal, aknowledging the fact that timing is crucial in a strongly cyclical and capital intensive market, such as international shipping, examined the case of Kamsarmax dry bulk carriers. In his report, Intermodal’s Panos Tsilingiris, said that for the purpose of the exercise, Intemodal assumed that contracting takes place today and delivery is scheduled after about two years. Furthermore, “the vessel is operated is operated by the buyer for 10 full years (including her second SS/DD) and is sold thereafter. The residual sale price is the resale price of the vessel depreciated over 10 years at 5% p.a. We accept newbuilding prices of $ 26.5 million basis 30/70 payment terms plus $ 500k pre-delivery expenses. With regards to financing, we suppose 60% loan with a fixed interest rate of 5% and 25% balloon, and arrangement/commitment costs of approximately 1.5% of the loan facility. The remaining 40% is financed via equity at 12% p.a. The Opex costs begin with xs $ 6,000/day and are subject to a 2.5% annual appreciation, while we also factor in indicative dry-docking costs. Assuming 365 OPEX days and 350 TC days, the resulting break-even TC rate for the 10-year period is $ 15,959/day” said Tsilingiris.
He added that “at first sight, the above figure may not enthuse speculators when compared to the current freight market in which Kamsarmax bulkers struggle to achieve double-digit yearly TC rates. However, the seasoned shipowner will recognize that this figure is well below the 20-year average, the 10-year average, and the 10-year average after excluding the 2007-2008 bubble years.
Further to the attractive break-even point, the driving force for newbuildings is the high price of bunkers; the ‘eco-type’ designs with their promised (yet generally unproven so far) increased energy efficiency appear tempting to both owners and charterers. Owners might prefer newbuildings over second-hand tonnage since they do not expect a radical peak-up in the dry bulk freight markets during 2012-2013. Moreover, the long operating life of a newbuilding provides some encouragement, if not statistical certainty, that the market will peak up at least once during the vessel’s operating life. There is hope that due to the significantly slower recent contracting of bulker newbuildings and assuming no collapse in demand, the market will return to healthy levels within 2015. Of course, massive orders, something not expected in the short-term given the current market, the tight financing and the global economic uncertainty, would negate any benefit from the lower break-even point of such investments” he said.
As a result, the report from Intermodal concludes that “while the exact figures depend upon the idiosyncrasies of the specific project and ship-owner as well as market conditions (LIBOR, actual TC rates, residual value, etc.), we have shown how the low entrance point for newbuildings renders attractive the break-even rate of such investments. In conclusion, as low shipbuilding prices gradually concur with the maturing of eco-type designs, newbuilding investments appear increasingly attractive” it said.
Nikos Roussanoglou, Hellenic Shipping News Worldwide
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