A series of interesting and extreme price spikes is going on in the shipping market today, says Clarksons, provider of global shipping and offshore market intelligence.
In fact the latest in a series of interesting and extreme price spikes is going on in the shipping market today. The graph shows the price of a 5 year old Aframax tanker divided by the price of a 5 year old Panamax bulkcarrier. The value of this ratio at the end of June 2015 was 265%, the second highest level on record.
To put that in perspective, the average since 1976 has been 146% (the dotted line). The lowest value was 70% in February 1981 and until April this year the highest value was 267% in June 2001. Any time a market produces this sort of extreme spike, it’s worth taking a close look at what’s driving it, to see if there’s a potential opportunity lurking in the background.
The first noteworthy observation is that today’s spike appeared very quickly. Eighteen months ago, in January 2014, the ratio was only 126%, below the long-term average. But since then the price of the Aframax tanker has shot up by 32% and the Panamax bulker price has slumped by 37%.
These major adjustments were driven by freight rate trends, reinforced by grim sentiment in the bulker market and a revival of interest in tankers. Could this be the moment to buy a bulker? Let’s see how previous spikes developed.
Looking back, the last two spikes were in 2006 and 2008. The 2006 spike was triggered by the boom tanker market of 2004-05. At the same time investors thought the bulker market had probably peaked out. But a 5 year old Panamax bought for $29m in January 2006 was a super deal, and would have sold for more than twice as much a couple of years later.
The spike in November 2008, just after the onset of the credit crisis, saw a 5 year old Panamax cost $26m. This was a strange time with little liquidity, but on paper the ship would have sold at a premium of more than 30% in 2010.
But the ‘mega-spike’ in June 2001 was the real winner. Trigger happy investors who had ordered cheap new Panamaxes in 1999 were taking delivery into a lousy market, and the price of a 5 year old ship slumped to $14m. This turned out to be a real bargain. Just over six years later the 11 year old ship would have sold for over $60m, having traded through the great boom market, earning around $40 million (after OPEX). That’s $100m revenue on less than $15m investment.
So there you have it. Spikes terrorise shipping investors, but often it’s a case of “no pain, no gain”. Only the vampire slayers, like good old Buffy, and a handful of intrepid shipowners have the courage to seize the day. But history also tells us that Spike’s appearances are short and sharp.