the valuation of ship, art and science - roger bartlett

The Valuation of ShipsArt and Science

ByRoger Bartlett,

Managing Director, Maritime Strategies International Asia Pte Ltd

For Marine Money’s6th Annual Korean Ship Finance Forum

Busan1st November 2012

1© Maritime Strategies International Ltd.

Maritime Strategies International

MSI est. 1986

Valuations

Business Advisory Services

London and

Singapore

Shipping Market

Forecasts-all sectors


Shipping banks, funds and financial Institutions

Shipbuilders, Class, Ship managers,

Public Sector, and others

Major ship owners and charterers

and traders

Clients from all parts of the shipping industry and across the globe..

High level, independent shipping market forecasts and business advisory services to the shipping and its

allied industries

MSI values all types of ships (incl. offshore)


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?


B. ELEMENTS OF A SHIP VALUATION

MSI The valuation of ships


What Determines Secondhand Vessel Prices?

• Current Replacement Cost - Sets Upper Reference to S&P Market(Yard Prices: Highly Unstable; Major Market Risk)


• Residual Scrap Values - Sets Floor to S&P Market ($/LDT:Limited Influence or Up-/Downside 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 )

1. NEWBUILDING PRICESElements of a Ship Valuation


New building price drivers

Shipbuilding Price Index ($/CGT)

Yard costs

Global Ship building Capacity

Global NewbuildingOrderbook


FORWARD COVER

0

500

1,000

1,500

2,000

2,500

3,000

3,500

0 1 2 3 4 5

$ CGT

Years Forward Cover

$ CGT Price (1980s)

$ CGT Price (1990s)

$ CGT Price (2000 to 2004)

$ CGT Price (2005 to 2008)

$ CGT Price (2009 to 2010)

Forward Cover and Price


1 to 2 Years

3 to 4 Years

• During the 1980’s and 1990’s FC remained in a 1 to 2 year bound

• During the mid 2000’s FC reached 4 years

• Forward Cover (FC) is a measure of the aggregate orderbookacross all sectors compared with total available global shipyard capacity and is measured in years

New building prices move in tandem across sectors

10© MSI Asia Pte Ltd

0

10

20

30

40

50

60

70

80

90

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

Mn US$ Newbuilding Contract Price

Aframax Tanker

Panamax Bulker

1.1kTEU FCC

24kCuM LPG Carrier

2.5kLm RoRo

Yard costs and prices diverge


0%

50%

100%

150%

200%

250%19

80

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

Index (2003=100) Yard Cost Versus Price

Av Yard Cost

Av Price

2. SCRAP PRICESElements of a Ship Valuation


Scrap Price


• Scrap price is a function of steel price, local steel demand and scrapping volumes

• Steel from scrapped ships makes up a small fraction of total scrap steel sales (approx. 10%), which is dominated by scrap auto sales

0

5

10

15

20

25

30

0

100

200

300

400

500

600

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

Mn GT

Ship Scrapping Volumes (RH Axis)

Scrap Price ($/LDT)

Steel Price Index (1980 = 100)

3. SECONDHAND PRICESElements of a Ship Valuation


Second hand prices


• All historical secondhand prices are converted into a net replacement value for the individual ship:

• NRV = (2nd 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

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

0 5 10 15 20 25 30

NRV

Age at Sale

Actual Transaction

Line of Best Fit

NRV Plotted – Sales Since 1990


Panamax Bulker

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

0 5 10 15 20 25 30

NRV

Age at Sale

Intermediate Market

Trough Market

Peak Market

Super Cycle

Depreciation and Earnings Relationship


Large Capesize Bulker



0%

20%

40%

60%

80%

100%

120%

140%

0 5 10 15 20 25

NRV

Age at Sale

Intermediate

TroughPeak

Super Boom

Large Capesize Bulker



0%

20%

40%

60%

80%

100%

120%

140%

5 10 15 20

NRV

Age at Sale

1990 1993 1996

1999 2002 2005

2008 2011

Handymax Bulker

Price and Earnings Relationship


Panamax Bulker

0

10

20

30

40

50

60

70

0%

20%

40%

60%

80%

100%

120%

140%19

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

10

‘000 $/dayNRV

10 year NRV Net Earnings (RH Axis)

Correlation = 0.90

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


Forward valuations: the added dimension

New building

price outlook

Earnings forecasts

Scrap price outlook


Shipyard, specifications,

design, proximity to survey, trade,

previous owners, flag..

0.00.51.01.52.02.53.03.54.04.55.0

2010 2015 2020 2025

Tank

Bulk

Cont

Forward ValuationsAssessment of

residual risks and rewards – banks, owners, insurers,

investors

B. HOW DO ISSUES IMPACT ON SHIP VALUES?

MSI Vessel Valuations



0

10

20

30

40

50

60

70

80

0 5Year 10Year 15Year 20Year 25Year

Young Ships face min risk

Newbuild Price

Scrap Price

Older ships values at greater Risk

Effect on values of falling scrap prices

New technology reducing life expectancy


0

10

20

30

40

50

60

70

80


Values of younger ships face small risk

Newbuild Price

Scrap Price

Old Ship values face maximum risk

Charter markets at rock bottom


0

10

20

30

40

50

60

70

80


Young Ships Face Max Risk

Newbuild Price

Scrap Price

Old Ships Face Min Risk

C. WHERE WILL VALUES GO NEXT?

MSI The Valuation of Ships


Newbuilding Prices Outlook


1.0

1.5

2.0

2.5

3.0

3.5

4.0

50%

75%

100%

125%

150%

175%

200%

225%

250%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

YearsIndex (2003=

100)Forward Cover (RH Axis) Av. Yard Cost Av. Yard Price

FC to drop below 2 years

Yard costs to remain at record highs

Yard costs pressure willhelp maintain

newbuilding prices

Earnings Outlook


• 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%

40%

60%

80%

100%

120%

140%

160%

180%

200%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Index(2003 =100) Container Bulker Tanker

2007 = 317%2008 = 327%

5 Yr Old Price Outlook


0

10

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30

40

50

60

70

80

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Mn US$ Panamax Containership Panamax Bulker Aframax Tanker

Downward pressureNB Price & Earnings

Scrap price offerssupport for ageing

tonnage

Newbuilding Prices

Newbuilding Prices

Q3 2012 Medium Term Outlook


Newbuildingprices declining over the next 12

months

More downside if capacity remains

open / operational

Scrap PriceScrap Price

Scrap prices to support older ship

values

$LDT price firm due to local scrap steel demand and global steel price

EarningsEarnings

Supply / demand balances skewed towards supply side for main

sectors

Gradual and sustained recovery in earnings during H2 2013 for most

sectors / sizes

2004 blt VLCC price history and outlook


0

20

40

60

80

100

120

140

160

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Ordered

2002 $66M

Delivered 2004

$105M (resale)

2012 approx$46M

Conference VLCC value tracking


-

20

40

60

80

100

120

140

160

180

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

NB

0

5

10

15

20

Scrap

MM KoreaVLCC

MM Korea VLCC (blt. 2004) value over time


Concluding thoughts

• Critical Element in decision making• Based on fundamentals and Independent• Future valuations permit assessment of residual

risks

Systematic approach to valuations

• Charter rates affects modern ship values most• New technology leads to dual/multiple markets• Changes in Scrap prices > impact older tonnage

Risks / Rewards

• New building prices bottom out 2013• Oversupply depressing markets affect modern

tonnage values more.. • Secondhand could provide good opportunities

“distressed” assets hard to find

Buy / Build now ?


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Tel: +65 6427 4180Email: [email protected]

www.msiltd.comHigh level, independent ship market forecasts, valuations and business advisory services for shipping and allied industries

the valuation of ship, art and science - roger bartlett

Documents

business advisory services

maritime strategies international

large capesize bulker

msi asia pte

scrap prices

scrap price

net replacement

residual risks