As secondhand bulkers continue to change hands at strong prices, buyers are betting rates will recover in the long-term to close the gap to asset values. But US-based consultant Urs Dur warned that the opposite could also be true. If earnings do not see a boost, then ship values must fall, he believes.

Durs, writing on behalf of the Baltic Exchange, said in a report that the “current gulf” between dry bulk asset values and freight rates will narrow in coming years. But it is harder to pin down which number will move towards the other, he added. “While macro conditions are daunting, the long-term outlook for dry bulk supports today’s asset values. However, this cannot last forever,” he said.

The correlation between the Baltic Dry Sector Health of Earnings Index (BDHEI) is negative at 56% of the Baltic Dry Sector Residual Value Index (BDRVI). “While earnings have predominantly fallen in the dry bulk sector over the year, asset values have been stable to rising,” Dur said. A five-year-old eco capesize was worth about $46m a year ago and today it is priced at $47m, while freight rates have dropped dramatically over the year. While five-year freight rates, with which the BDRVI is calculated, have fallen, the drop has not been followed by an equivalent fall in asset values — yet. “While shipping asset values and freight rates often lag each other, the current gulf is pronounced,” Dur added. But he said that despite near-term uncertainty, the longer-term appears attractive to investors.

“Those buying bulkers in today’s value/freight environment are betting that freight rates will recover substantially over the next few years in order to justify the valuations of today,” the analyst added. That bet may well be a good one, he believes. The dry bulk orderbook is at 7% — historically low. And owners face a challenge to get any ships ordered today delivered in time to experience the full dry bulk market recovery, Dur argues. “Additionally, propulsion options and environmental requirements have made ordering more complex. These supply conditions support the value of bulkers on the water today,” he said.

There is more relatively positive news for bulkers as well, Dur believes. “There has been a draw of iron ore inventories at Chinese steel mills, just as the Chinese are beginning to stimulate the economy,” he said. “Tightening carbon emission requirements will continue to favor the chartering of modern tonnage while older tonnage may need to power down further, reducing fleet capacity, to meet emission standards,” Dur added. While the Baltic Capesize Index is down 77% year-on-year, five-year-old eco capesize values have risen 2%. “In time, freight rates will move to justify values, or the other way around,” Dur said. “That may sound non-committal because it is. Shipping is deeply cyclical due to the long-lived nature of ships, but the market can be as jagged and as sharp as shark’s teeth within the cycle. Also, the shipping demand side is much harder to handicap than the supply side,” he added.

The BDHEI is an index representing the ratio of earnings against running costs, involving capesizes, panamaxes, supramaxes and handysizes. The BDRVI is calculated by taking the purchase price for a five-year-old vessel and deducting the net earnings over a five-year period.