The Hindu Business Line : Second-hand vessels selling high

An Indian shipping company, having a fleet of a few bulk carriers, is mulling the sale of one of the ships, a five-year-old Panamax vessel. The reason: The vessel is fetching a "very good" price, about $44 million, which is more than what had cost the company at the time of acquisition. If one adds to it the freight earned by the vessel over the past five years, the gain is substantial.

"True, the company will be downsizing the fleet but it will be foolish not to take advantage of the present booming market condition," observes a shipping expert.

The company has two other bulk carriers, acquired not long ago. Together, the vessels cost around $50 million at the time of acquisition. Today, the same vessels together command a price of more than $60 million in the market. If sold, the earning, together with the freight earned in past one year, would be handsome. Will the company then sell these two vessels also?

Not really. After all, the company is in shipping business and the earnings from the operation of the ships too have been satisfactory in recent times. But then, as the expert points out, "the buying and selling of assets, known as asset play, should go hand in hand with normal shipping operations and there has to be judicious mix of the two."

Asset Play

Not all shipping companies are cut out for asset play. According to some experts, a shipping company has to have a large fleet, "not less than 10 ships, maybe 15 if not more." Also, those in the midst of building tonnage may not be warm to the idea of selling assets. For example, an Indian shipping company has ordered three tankers with a Korean yard, each costing around $65 million with delivery due in 2008. The present S&P (sale and purchase) market suggests that even the resale price of these vessels will be substantially more than their costs. But, then, the company which is in the process of building up a fleet of a particular type of tankers is no mood to sell.

What to do with proceeds?

There is another problem. What would a shipowner do with the sale proceeds ? The obvious answer would be, use the proceeds for acquisition of tonnage. But in a booming market when the ship prices are high, the acquisition too may not be easy. At present, one shipping company is ready to buy at least four bulk carriers — Handymax and Panamax, two each — but having second thoughts over whether to buy right now or to postpone it in view of the skyrocketing prices of the second-hand tonnage.

As the freight market rises, the price of ships too jumps, pushing up the asset valuations of the vessels but at the same time making it often difficult for the shipowners to decide what to do, that is, whether to carry on with the normal shipping operation with the existing tonnage or to downsize the tonnage and make some windfall gain. The problem is all the more because in no other industry the value of assets fluctuates as much as in shipping, even as the 90 per cent of the assets of a shipping company floats in waters.

Several Indian companies in the recent past sold their ships to cash in on the booming market. According to a report in the Lloyd's List, Varun Shipping, Tolani Shipping, Mercator Lines, West Asia Maritime and Chettinad together sold eight vessels in the Handymax class, knocking off an estimated 360,000 dwt from the national tonnage.

All the vessels, save one, were in the 45,000-48,000 dwt range. There was one 56,000 dwt Super Handymax, or Supermax as it is often called.

Change of business

While booming asset prices was certainly the major reason for the sell-off, some of the lines, it was revealed, also proposed to get out of the bulk movement. Varun, already concentrated in transportation of liquefied petroleum gas, sold the only bulk carrier it had. The same is true about Century and Chettinad whose owners would like to focus on tankers as the tanker market was considered firm. Great Eastern Shipping, a big name in Indian shipping and also active in asset play, sold off six vessels in 2005-06 and two so far in the current year. Of the six vessels sold last year, three were tankers, (VLCC, an Aframax and a product carrier) and three Handysize (ranging between 35,000 and 38,000 dwt). Two vessels, both tankers, have been sold so far this year, one each in each quarter — a product carrier (44,000 dwt) in the first quarter and an Aframax (96,000 dwt) crude tanker in the second. Together, an estimated 512,000 dwt, has been knocked off the company's tonnage now standing at 2.75 million dwt, likely to rise to 3.6 million dwt in the next two and half years as the new acquisitions — one Suezmax, (1996 built) one Capesize (1996 built) and nine product tankers — will start arriving in phases from Q3 of this year.

The trend is the same all over the world. The second-hand vessel prices firmed in recent times, particularly on the dry side, and the sales covered all sizes, from Handies up to Capes with Supermax taking the spotlight. Steadily rising charter rates in the dry bulk market in recent past led transport analysts to raise their forecasts, particularly for Asia dry bulk. Chinese imports of iron ore and exports of steel and cement stood out in particular. A further strengthening was expected as the shipping sector entered the peak coal movement season. However, some analysts also warned of a possible "hard landing" in China by the government's move to cool a red-hot economy.