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Heading for the beaches?

Sales activity is up – but so is scrapping

Whilst orders for newbuildings seem to have ground to a halt – Platou records none at all over the first quarter of 2009, and the trend continued throughout April – there has been considerable activity on the dry sale and purchase market, which was reportedly busier than at any time since 2007. Prices for a modern capesize rose from $58 million in January this year to $65 million in March, falling back to $63 million in April, as the market rallied and then weakened again. Prices held steady in the panamax and handymax sectors. Platou reports that much of the interest has been focused on older vessels, built in the 80s and 90s.

The tanker market has remained quiet, with Platou commenting that “prices are under pressure for all types, and given the current freight market we do not see activity picking up until prices are down to corresponding levels”. At the time of writing a five year old VLCC was priced at some $90 million dollars, against $105 million for a new vessel of the same size.

Cars and boxes

As might be expected in times of a falling market, a large number of ships have been sold for scrap. Clarksons Shipping Information network reports that containerships are amongst those likely to be heading for the beaches. According to analyst Robyn Pylypiw, 36 boxships with a combined capacity of 57,717 TEU were sold for scrap in the first quarter of 2009. She expects scrapping to continue at or around these levels for the rest of the year, with more than 200,000 TEU projected to be sold for demolition by the end of the year. Car carriers have also been hit hard by the slowdown in customer demand: eight have been sold for scrapping so far this year, a higher scrapping rate than at any time since 2001, according to Clarksons.

Bulkers

On the dry side, Platou estimates that 23 bulk carriers, representing some one million dwt, were sold for scrap in April, while a total of five million dwt has been removed from the fleet since the start of the year. In the tanker sector, capacity of some 1.5 million dwt has been scrapped over the same period, although Platou estimates that up to 18% of the tanker fleet is still single-hull tankers that will need to be phased out by the end of next year.

Demolition prices have fallen considerably as a result, down from $240 per tonne in the Far East in February to $200 per tonne at the end of April. Despite this fall, the rush to get rid of excess tonnage continues. While most owners will look at scrapping as a means or reducing the size of an underperforming fleet, other companies are set up to take advantage of the opportunities this offers.

Going green

Pearl Minerals and Metals Ltd, an Australiabased minerals fund, for example, has recently launched Green Recycling Initiative (GRI), a Singapore-based company specifically formed to buy and recycle ships. GRI will seek up to 150 investors from the shipowning and steelmaking industries, to establish a fund to buy around 120 bulk carriers during 2009/10. The ships will be held in dock or in selected storage area until they can be scrapped in accordance with best environmental practice.

Italy-based Siba Ships and Netherlandsbased Seaarland Shipping Management have been named as the inaugural investors in the $300 million fund. According to Mauro Balzarini, chairman of Siba Ships: “The bulk carrier market in particular now is ripe for major scrapping, and when the world economy gets moving again demand for steel will take off quickly [...] The Green Recycling Initiative is an opportunity for shipowners and steel makers to join a sound, clean, green and long-term business which will make shipping and steel making more environmentally friendly, and also produce good returns for those quick enough to see the opportunities.”

Brokers under pressure

Valuing the ships to be purchased may, however, be no easy feat. The International Transport Intermediaries Club (ITIC) says the fall in the shipping markets has created a number of difficult issues for ship valuers, with brokers in some cases even declining to provide valuations. According to ITIC’s Andrew Jamieson: “It is inevitable that some principals will simply be disappointed by the broker’s view of what the ship is likely to obtain in the current market. But brokers have also been challenged as to whether it is really possible to assess market levels if the number of sales is limited or even non-existent.

“The commercial pressures on brokers are evident. There are cases of brokers having been asked to show values to the shipowner prior to submission to the bank, together with suggestions that, if they did not do so and the owner did not like the values, then litigation would follow. Because some broking houses have long-term contracts to provide valuations to financial institutions, it is not a realistic option to stop providing the service. “The confidentiality of valuations can be an issue for brokers. A bank commissioning a valuation may feel that the independence of the valuer would be compromised if the value had been discussed with the owner prior to submission to the bank. At the same time, brokers cannot afford to alienate their clients, but the problem can be solved by the broker making it clear to the bank that it may contact the owner.”

Redrafting certificates

ITIC says that it has recently been helping its members to redraft their certificates to reflect the drop in sales, and has previously advised brokers dealing with specialist tonnage on wording that reflects the nature of individual markets.

Jamieson says, “The majority of ship valuations are given on the basis that the sale is assessed between a willing buyer and a willing seller. With such low volumes, however, could there really be said to be willing buyers and willing sellers? The expression ‘willing buyer/willing seller’ is used to indicate that the sale is not a forced sale. If the valuation is made on a different basis, then clearly other wording needs to be included to reflect this. In one recent example, the broker stated that the view being given was on the basis of a seller requiring a prompt sale. The important consideration is that the basis on which the valuation is given should be clear to the reader.”

A number of ITIC’s members have been asked to provide alternatives to the traditional valuation formula. One principal requested a report on the mean average annual value of a type of ship. The vessel in question was newly completed. The report set out the vessel’s specifications and stressed that what was being provided was the mean average annual value of a newly built ship of similar description over the previous ten years. The certificate made it clear that it was not an assessment of the current valuation of the ship.

Jamieson concludes, “Time will tell how much long-term demand there will be for alternative assessments. Brokers could find they are offering an expanded range of assessments in response to client requirements. The valuer must however make sure that the nature of the valuation or assessment is clear from the certificate. That is likely to require more than simply amending existing forms.”

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