Shipping Asset Valuations at the Age of COVID-19

Updated: Oct 24, 2020

At unprecedented times, attention to details and minor concepts for the shipping appraisal practice

The COVID-19 pandemic has caused real turbulence to every lifestyle and everyday activities, whether social or business-related. Specifically for the shipping industry, while most of the focus currently has been on shipping operations and supply chain disruptions, questions have started arising on shipping asset valuations and values, and how these can affect underlying transactions and specifically shipping loans and leasing transactions.

There have been many inputs and variables to consider, and this still is a developing story, that seems to be running in parallel to developments with COVID-19, and also, to a great extent, in correlation to the oil industry.

For starters, there is a collapse in shipping asset secondary market transactions in the last couple of months; in terms of the number of outright sale & purchase transactions for the overall shipping market, year-to-day there have been 30% fewer transactions than same period last year. One has to keep in mind that shipping asset sale & purchase is not a fluid and smooth market even at the best of times, but definitely this year there has been a drop in terms of transactions, especially for certain asset classes like containership vessels. For other types of vessels such as Very Large Crude Carriers (VLCCs), and tankers in general, there has been stronger than usual interest, given the strong – but extremely volatile freight market, whose Brownian pattern is driven by the latest news of crude oil pricing and the prospects of the contango play.

The reason for the decline in number of sales can partially be explained due to operational reasons, as buying a ship requires a pre-purchase survey condition reporting and also crew changes, etc, activities that have been heavily curtailed in the last few months. Also, at a time of fast moving developments worldwide, for any shipowner, the focus has been on acting and reacting quickly and ensuring smooth vessels operations and trying to make the best out of a hot tanker freight market rather than on paying attention to ship acquisitions, unless, of course, there are vessels offered for sale at bargain prices. Thus, when it comes to shipping valuations, as far as the market comparable approach is concerned, there has been a lower volume of data-points, and values recorded have been processed via the COVID-19 lens.

Another shipping activity that requires extensive traveling and face-to-face negotiations is newbuilding activity. As one would surmise, overall newbuilding ordering has dropped by almost 60% so far this year when compared to newbuilding activity over same period last year. [Incidentally, other shipyard-related activities such as completion of vessels under construction, ship repairs, installation of scrubbers, etc have been running on slow motion as well.] Once again, in a fast moving and highly unpredictable world, making a decision that is expected to last several decades, such as committing to newbuilding orders, is very low on the list of priorities of shipowners and shipping companies. Given the declining outstanding orderbook and also declining commodity prices, logically, replacement costs for shipping assets likely to trend lower in the near future once the market returns to its (new) normal. But for now, we have to satisfy with the dearth of fresh data-points for newbuilding prices and the replacement cost new, when it comes to vessel appraisal process.