SECONDHAND SHIPS: Market Sector Prospects And Investment Options During The 1990s

For the investor looking at rates of return from the secondhand ship market, the 1990s should see major changes in the fortunes of players working the different fleet sectors. Taking the return generated on both trading profits (defined as time charter revenue less operating expenses) and asset appreciation, it is foreseen that tanker investments could be transformed from 1993 onwards with the rate of return indicators moving these vessels from among the least to the most impressive performers. In the dry sector, the most consistently impressive returns emanate from the specialist refrigerated cargoship (reefer) sector. Elsewhere, after a period of early promise, returns deteriorate.

Drewry Shipping Consultants' report, Secondhand Ships: Market Sector Prospects and Investment Options during the 1990s, examines the performance of 20 ship age/size/type permutations over a five year investment cycle and has developed the relative rankings shown in Table 1.

Fundamental to the development of the rankings for different secondhand ship investment options is the report's assessment of likely developments in key market sectors and their impact on supply/demand, freight rates and secondhand ship values. In essence, these can be summarized as: • Dry bulk carriers: A fairly tight supply/demand picture is envisaged though the imbalance could widen as the decade progresses.

There will be strong upward operating cost pressures and continuing firmness in newbuilding prices.

In the Handy and Handymax classes (25-50,000 dwt), older tonnage offers the better level of returns. More modern units, which are relatively scarce and tend to offer greater multipurpose/ neo-bulk flexibility, tend to command premium values yet their earnings potential is strongly influenced by the downtow from the older vessel sector.

For the Panamax class (50-80,000 dwt), the trend is reversed mainly on account of the narrower earnings differentials with both five- and ten-year-old ships possessing fuel economy features. The Cape sector (around 120-140,000 dwt) is less impressive. Here, values will be influenced by questions of quality. On the earnings side, one of the key problems is that the only regular supply of open tonnage (which is crucial in determining freight rates) is the aging fleet element which is currently the subject of so much concern.

• Tankers: For the investor looking at secondhand tanker options during the 1990s the vital factor will be age concern. In deadweight tonnage (dwt) terms, virtually 50 percent of the fleet of 10,000+ dwt lies within the 15- to 20-year-old age bracket with much of this being of million barrel or VLCC capacity. In the near to medium term it is expected that the market's supply/ demand imbalance will begin to improve as many of the less desirable units are disposed of. After some asset value depreciation, therefore, the scope for later returns returns on quality tonnage looks impressive.

• Other ship types: Of the dry cargo options, the highest rankings are achieved by reefer vessels. However, this is a tightly knit market. Well maintained, pallet friendly types could prove to be a lucrative investment vehicle provided that the operator can meet the demanding requirements of the trade.

The conventional general cargoship ('tweendecker) sector is and will remain a vast trading sector although the erosion of opportunities by containerships (both line haul and feeder) will push these vessels more and more into minor bulk or peripheral markets. The crucial factor, however, will be the recognition that 'tweendecker trading is now very much a regional, niche market operation.

Simple economics also ensure that the small ship end of the dry cargo market is a specialized niche market operation. Its competitive nature also ensures that it will not be a huge profit center.

Among the other ship type categories are found the specialist areas where for operational and other reasons the speculative investor is unlikely to venture.

These include gas, liquid chemicals and container ships. In the gas sector, activity would be with LPG ships. Here the market is likely to weaken until middecade.

The liquid chemicals sector has undergone a good deal of rationalization over the last couple of years with the result that sale and purchase activity is likely to be limited for some time to come. Values, therefore, should remain stable. For unitized tonnage, market improvements are expected to focus primarily on the post-1995 period with values remaining reasonably stable in the interim.

However, the potential for roll on/roll off (RO-RO) types is seen as the least impressive element in this sector.

In addition to these market sector considerations, Secondhand Ships: Market Sector Prospects and Investment Options during the 1990s, also provides an assessment of the other key considerations that a prospective investor in secondhand ships has to take into account. Included among these topics is a guide to owner's buying rationale, the factors that help determine individual ship prices and the nature of the sale and purchase transaction itself (documentation, finance, etc.). An insight is provided also into the continuing costs that have to be recovered once a purchase has been made. Finally, the report contains an appraisal of market and price developments since 1980 which offers insights into key market influences and their impact as well as providing a starting point for assessing the scale of up and downside levels of risk.

For further information, contact: Drewry Shipping Consultants Ltd., 11 Heron Quay, London E14 4JF; telephone 071-538 0191; telex 21167 (HPDLDN G).