The Valuation of Ships Art and Science By Roger Bartlett, Managing Director, Maritime Strategies International Asia Pte Ltd For Marine Money s 6 th Annual Korean Ship Finance Forum Busan 1 st November 2012 1
Maritime Strategies International High level, independent shipping market forecasts and business advisory services to the shipping and its allied industries Clients from all parts of the shipping industry and across the globe.. Valuations Shipping Market Forecastsall sectors MSI est. 1986 Business Advisory Services Major ship owners and charterers and traders Shipping banks, funds and financial Institutions Shipbuilders, Class, Ship managers, Public Sector, and others London and Singapore 2
MSI values all types of ships (incl. offshore) 3
Outline The Valuation of Ships A. Elements of a ship valuation * 1.Newbuilding, 2. Scrap prices, 3. Second-hand prices and 4. Forward Valuations B. What impacts ship values? * Falling scrap prices, New technology and economic trauma C. Where will prices go next? D. Conclusions * Systematic approach pays dividends, risks & rewards, buy/build now? 4
MSI The valuation of ships B. ELEMENTS OF A SHIP VALUATION 5
What Determines Secondhand Vessel Prices? Current Replacement Cost - Sets Upper Reference to S&P Market (Yard Prices: Highly Unstable; Major Market Risk) Expected Earnings - Sets Depreciation Rate (TC Rate, Vessel Life Expectancy) Sale Timing and Operational Specifics -Sets Exact Price (e.g. Proximity to special survey, vessel condition ) Residual Scrap Values - Sets Floor to S&P Market ($/LDT:Limited Influence or Up-/Downside Risk) 6
Elements of a Ship Valuation 1. NEWBUILDING PRICES 7
New building price drivers Yard costs Shipbuilding Price Index ($/CGT) Global Newbuilding Orderbook FORWARD COVER Global Ship building Capacity 8
Forward Cover and Price $ CGT 3,500 3,000 2,500 2,000 $ CGT Price (1980s) $ CGT Price (1990s) $ CGT Price (2000 to 2004) $ CGT Price (2005 to 2008) $ CGT Price (2009 to 2010) 3 to 4 Years Forward Cover (FC) is a measure of the aggregate orderbook across all sectors compared with total available global shipyard capacity and is measured in years 1,500 During the 1980 s and 1990 s FC remained in a 1 to 2 year bound 1,000 500 1 to 2 Years During the mid 2000 s FC reached 4 years 0 0 1 2 3 4 5 Years Forward Cover 9
New building prices move in tandem across sectors 90 Mn US$ Newbuilding Contract Price 80 70 60 Aframax Tanker Panamax Bulker 1.1kTEU FCC 24kCuM LPG Carrier 2.5kLm RoRo 50 40 30 20 10 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 MSI Asia Pte Ltd 10
Yard costs and prices diverge 250% Index (2003=100) Yard Cost Versus Price 200% Av Yard Cost Av Price 150% 100% 50% 0% 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 MSI Asia Pte Ltd 11
Elements of a Ship Valuation 2. SCRAP PRICES 12
Scrap Price 600 Ship Scrapping Volumes (RH Axis) Mn GT 30 500 400 Scrap Price ($/LDT) Steel Price Index (1980 = 100) 25 20 Scrap price is a function of steel price, local steel demand and scrapping volumes 300 200 100 15 10 5 Steel from scrapped ships makes up a small fraction of total scrap steel sales (approx. 10%), which is dominated by scrap auto sales 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0 13
Elements of a Ship Valuation 3. SECONDHAND PRICES 14
Second hand prices All historical secondhand prices are converted into a net replacement value for the individual ship: NRV = (2 nd hand price scrap price in YoS) (Newbuilding price in YoS scrap price in YoS) This (expressed as a %age) allows us to compare all prices over time independent of both new building and scrap prices 15
NRV Plotted Sales Since 1990 NRV 180% Panamax Bulker 160% 140% 120% Actual Transaction Line of Best Fit 100% 80% 60% 40% 20% 0% 0 5 10 15 20 25 30 Age at Sale 16
Depreciation and Earnings Relationship NRV 180% Large Capesize Bulker 160% 140% 120% 100% Intermediate Market Trough Market Peak Market Super Cycle 80% 60% 40% 20% 0% 0 5 10 15 20 25 30 Age at Sale 17
Depreciation and Earnings Relationship NRV 140% Large Capesize Bulker 120% 100% 80% Intermediate Trough Peak Super Boom 60% 40% 20% 0% 0 5 10 15 20 25 Age at Sale 18
Depreciation and Earnings Relationship NRV 140% 120% 100% Handymax Bulker 1990 1993 1996 1999 2002 2005 2008 2011 80% 60% 40% 20% 0% 5 10 15 20 Age at Sale 19
140% 120% Panamax Bulker Price and Earnings Relationship NRV 10 year NRV Net Earnings (RH Axis) Correlation = 0.90 000 $/day 70 60 100% 50 80% 40 60% 30 40% 20 20% 10 0% 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20
Secondhand Values Secondhand prices can be expressed as Net Replacement Values Removes the steel element and allows comparisons over time Shape of depreciation curve is driven by earnings environment The poorer the earnings environment the more concave the depreciation Net Replacement Value can exceed 100% in very strong earnings environment 21
Forward valuations: the added dimension Shipyard, specifications, design, proximity to survey, trade, previous owners, flag.. New building price outlook Earnings forecasts Scrap price outlook Forward Valuations 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2010 2015 2020 2025 Tank Bulk Cont Assessment of residual risks and rewards banks, owners, insurers, investors 22
MSI Vessel Valuations B. HOW DO ISSUES IMPACT ON SHIP VALUES? 23
Effect on values of falling scrap prices Newbuild Price 80 70 Young Ships face min risk 60 50 40 Older ships values at greater Risk 30 20 Scrap Price 10 0 0 5Year 10Year 15Year 20Year 25Year 24
New technology reducing life expectancy Newbuild Price 80 70 60 Values of younger ships face small risk 50 40 30 Old Ship values face maximum risk 20 10 0 Scrap Price 0 5Year 10Year 15Year 20Year 25Year 25
Charter markets at rock bottom Newbuild Price 80 70 60 Young Ships Face Max Risk 50 40 30 Old Ships Face Min Risk 20 10 0 Scrap Price 0 5Year 10Year 15Year 20Year 25Year 26
MSI The Valuation of Ships C. WHERE WILL VALUES GO NEXT? 27
Newbuilding Prices Outlook Index (2003= 100) 250% 225% 200% 175% 150% Yard costs pressure will help maintain newbuilding prices Forward Cover (RH Axis) Av. Yard Cost Av. Yard Price Yard costs to remain at record highs Years 4.0 3.5 3.0 2.5 125% 2.0 100% 75% FC to drop below 2 years 1.5 50% 1.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 28
Earnings Outlook Index (2003 =100) 200% 180% 160% 140% 120% 100% 80% 60% 40% Container Bulker Tanker 2007 = 317% 2008 = 327% Earnings forecast will trough over the next 18 months for the main sectors Bulkers will hit lows first shortly followed by tankers and then containerships 20% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 29
5 Yr Old Price Outlook Mn US$ Panamax Containership Panamax Bulker Aframax Tanker 80 70 60 50 40 30 Downward pressure NB Price & Earnings 20 10 0 Scrap price offers support for ageing tonnage 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 30
Q3 2012 Medium Term Outlook Newbuilding Prices Newbuilding prices declining over the next 12 months Scrap Price Scrap prices to support older ship values Earnings Supply / demand balances skewed towards supply side for main sectors More downside if capacity remains open / operational $LDT price firm due to local scrap steel demand and global steel price Gradual and sustained recovery in earnings during H2 2013 for most sectors / sizes 31
2004 blt VLCC price history and outlook 160 140 120 Delivered 2004 $105M (resale) 100 80 2012 approx $46M 60 40 20 0 Ordered 2002 $66M 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 32
Conference VLCC value tracking 180 160 140 120 NB 0 5 10 100 15 80 60 40 20 Scrap MM Korea VLCC 20-2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 MSI Asia Pte Ltd 33
MM Korea VLCC (blt. 2004) value over time 34
Concluding thoughts Systematic approach to valuations Critical Element in decision making Based on fundamentals and Independent Future valuations permit assessment of residual risks Risks / Rewards Charter rates affects modern ship values most New technology leads to dual/multiple markets Changes in Scrap prices > impact older tonnage Buy / Build now? New building prices bottom out 2013 Oversupply depressing markets affect modern tonnage values more.. Secondhand could provide good opportunities distressed assets hard to find MSI Asia Pte Ltd 35
Maritime Strategies International Ltd www.msiltd.com High level, independent ship market forecasts, valuations and business advisory services for shipping and allied industries London: 2 Baden Place London SE1 1YW Tel: +44 (0)207 940 0070 Fax: +44 (0)207 940 0071 Email: info@msiltd.com Singapore 8, Shenton Way #12-01, AXA Tower Singapore 068811 Tel: +65 6427 4180 Email: roger.bartlett@msiltd.com