The ‘planets’ are aligning for investment in the dry bulk market
Now is a good time to invest in shipping if Andrew Hampson, managing director of asset backed investments at Tufton Oceanic, is to be believed. Speaking at last week’s Marine Money London Forum, Mr Hampson founded his assertion on nine key indicators, or ‘planets’, which when aligned give an insight into the state of the industry and indicate “an inflexion point” when investment strategies should be revaluated.
Mr Hampson’s first planet is yard breakeven costs, specifically when yard prices fall below yard breakeven costs. For only the second time in the last 30 years, that indicator has been met across most shipping sectors.
The second planet is secondhand prices that fall below depreciated replacement cost. Why would an operator buy a newbuilding when a secondhand vessel is cheaper on a relative basis, he asked. “This previously occurred in a few small blips in 2014 and 2015,” he added, “but prior to that, we go back to 1999 before we saw this in any consistent way.”
The third planet is the collapse in newbuilding orders, he continued. Here, dry bulk is leading the way having recorded very few new orders over the last 18 months. But, more recently, there has been a dramatic reduction in orders for tankers, containers and in the offshore sector. Mr Hampson added that he now sees this measure at an all-time low.
“We feel there will be increasing amount of events that are outside of our control and, therefore, the best we can do is to make sure that our own shops are in order and be best prepared to take on the challenges ahead”
Moving on to capital markets, Mr Hampson said that he sees enterprise value falling below resale value – planet four – and that access to capital has dried up – planet five – noting a steady decline in dollar terms since 2010 through to the estimates for 2016.
Planet six is liquidity in the capital markets. “There has been a general decline over the last five years and back down to the lows that we saw in 2012, although there is a small tick up towards the end of last year that we hope persists,” he said.
Lack of liquidity in physical assets is the next planet. Here, Mr Hampson looked at the volume of secondhand transactions, both in the number of ships and in dollar terms. “We can see this falling off quite dramatically over the last three years to a level which is actually about average over recent times. Of course, we want that to persist for as long as possible,” he said.
The eighth planet is scrapping. “In 2015 and 2016, we saw very strong figures on the scrapping side in the first half of each year, only for it to dissipate in the second half of each year,” he said. While Mr Hampson does not expect to see the same seasonal trend over the next couple of years, he does expect the trend for increased scrapping to continue “as regulatory changes in the industry come into effect” and “the general state of the industry has a positive impact on the exit of bulk tonnage from the system”.
The last planet is ship yard inflation costs. Here, Mr Hampson said: “We’re just exiting a five-year period of general deflation and only recently, during 2016, starting to see public pressure on building costs. We think that this is very positive, hopefully putting increasing pressure on artificial yard subsidies and further deterring newbuilding.
“This is our view of the universe and why, at Tufton, we feel it is a good time to be considering investing in shipping,” he concluded.
Mr Hampson did, however, give one word of warning to the audience by way of a small anecdote: “In September 2015, I gave a talk at maritime Cyprus where I jokingly concluded by saying who knows what is going to happen in the world of politics. By the time we next meet in September 2017, we might have the UK leaving the EU, Donald Trump as US President and Jeremy Corbyn as UK Prime Minister. Well, we’re two down and I’ve got nine months to go.
“We feel there will be an increasing amount of events that are outside of our control and, therefore, the best we can do is to make sure that our own shops are in order and be best prepared to take on the challenges ahead.”