FOR asset markets, 2016 so far has been characterised by structural overcapacity, depressed charter rates and a lack of financing available for many dry bulk owners. Secondhand vessel prices have been hit so badly that the bigger ships in the dry bulk segment such as capesizes are worth less today than they were almost a decade ago.

According to UK consulting firm Maritime Strategies International, the first quarter of this year was marked by massive deterioration in bulker secondhand asset prices. On average, prices fell by almost 25% quarter on quarter in sharp contrast to the relatively minor deterioration in newbuilding contract prices. “Older ships saw the greatest value destruction, with 15-20-year-old prices dropping by almost 30% quarter on quarter, whilst zero-year-old ship values dropped by just under 20% quarter on quarter,” said MSI senior analyst Will Fray. “However younger ships have broken new ground with their current values — in net replacement terms, five-year-old vessels are now worth around 39% of the differential between contracting and scrap prices,” he said.

Against this backdrop, the number of secondhand bulker sales in the first quarter of this year reported by MSI stood at 168 vessels, the highest total since the second quarter of 2014. MSI’s first-quarter assessment of the value of a five-year-old capesize vessel was $22m, well below the previous record low of $27m in 2002. To place the scale of the recent value deterioration into context, the average fourth-quarter 2015 value of a five-year-old capesize vessel was $29m.

Despite secondhand prices being at all-time lows, owners have not been able to grab too many deals as the banking sector had severely tightened lending to the shipping industry. So the pool of buyers in the market remains limited to those with cash saved from the boom years. MSI expects the industry’s acute cash flow problems to persist. In addition to the scale and longevity of a freight market slump, the cost of finance will play a major role. Debt service provisioning is clearly a critical issue and restructuring is a key agenda for struggling shipowners and lenders alike, says MSI.

Meanwhile, MSI forecasts secondhand prices to recover from 2018. “We anticipate secondhand prices to recover from 2018 — this will be a slow and marginal recovery over the medium term, mainly due to expectations of weaker ordering of new tonnage and also as a result of massive redundant shipyard capacity in China that at times may be reactivated for specific projects,” Mr Fray said. “Dry bulk vessel values are right now at bargain basement levels but potential buyers must have access to sufficient capital to cover debt service for several years, and a robust constitution to bear the significant downside risks to a market recovery if they are to buy in at this point.”