Will yard cutbacks see prices spiral?

Amid a flurry of enquiries from owners, yards are pushing prices up after a long slump — but how far might they go?

Remember the 1980s? Big hair, gormless power rock, deregulated financial markets, and shipping markets that some argue were even worse than those of the past two years. But at least new ships were cheap. In 1987, a VLCC newbuilding could be ordered for less than $40m as yards fought for survival, as shipbroker Barry Rogliano Salles (BRS) reminded us in its annual review.

By the mid-1980s after eight years of crisis, European yards — at that time, they accounted for about half the world’s capacity — started collapsing like dominos. In France, four out of five major yards closed in 1987.

The result? As the freight market took off, so did prices. Just four years later, a new VLCC cost $100m.

The first part of the scenario sounds eerily familiar to the situation today. BRS estimates that capacity cuts for today’s three major shipbuilding nations could reach 50% in South Korea, 30% in China and 20% in Japan in the next year or two as they grapple with the impact of the crisis.

So if yard capacity shrinks, might the price of newbuildings shoot up again or even more than double? And if that’s a threat, does it make even more sense to get in early to order replacement tonnage soon?

Prices of newbuildings in China are now about 25% cheaper than in mid-2011, according to the benchmark indices compiled by Shanghai’s United Shipping Consultants. Adjusted for inflation, a 1987-built VLCC that cost $40m is very close to the $80m players are paying for today’s VLCCs, even though they are slightly larger and better equipped.

Such prices have already attracted several big names to sign up for fleet-renewal deals, and more maybe to come judging by comments from others.

As TradeWinds reported last week, yards are already ratcheting up their prices for bulker newbuildings after a flurry of approaches from owners keen to catch the market before it takes off.

However, more significant price rises will demand a much brighter outlook for cargo as well as availability of finance. Both remain in short supply. Buyers should be prepared for yard price hikes, but we are unlikely to return to the late 1980s. And that’s a good thing.