High Marine Asset Values Are A Blessing, But Don’t Ignore The Challenges!
By Basil M. Karatzas
Among the biggest surprises in the post-COVID world has been the current price of steel plate. For anyone who had to ask a shipyard for a quote for the repair of a marine asset, “sticker-shock” was the first reaction before getting to decide whether the repairs were necessary enough to justify the current cost.
In general, steel plate price has more than doubled in the last year, from approximately $0.40/lb. to $0.90/lb. in the U.S. Gulf. In more practical terms, for assets like hopper barges (as their cost is mostly material- rather than labor-driven), newbuilding prices for open jumbo hopper barges have moved from below one-half of a million to just above 1 million in the last year; likewise, their scrap price has moved from $40,000 to more than $100,000.
Escalating steel prices have affected newbuilding prices from the construction of marine assets in the Chinese shipyards for large ocean-going vessels to the smaller shipbuilders on the Mississippi riverfront, mostly on the back of a rally in the commodities market that has driven up steel prices. For larger commercial vessels, newbuilding prices have moved higher by 10-30 percent, but for small marine assets like hopper barges—where the newbuilding cost is mostly steel-plate driven—newbuilding prices more than doubled. That’s a big change!
Higher asset prices have many implications for the market, especially if such asset price increases are meaningful, take place quickly and are lengthier in duration.
For starters, for the current owner of assets, higher asset prices are good news, as now their fleets are worth (much) more, which allows for selling assets for a profit, or even more astutely, refinancing their assets in a higher market and freeing more “equity” from their fleets to pay dividends or redeploy the sale proceeds elsewhere in the business. For the owners who were ordering vessels in the last few years at low newbuilding prices, their investment now seems even more perspicacious given that they now own very modern assets with a low cost basis.
High steel prices have driven up scrap prices as well, and thus, all those old, idle, in-need-of-repairs barges lurking on the waterfront around the coast and the riverways are now sold for scrap at these high prices and with a clear conscience. Most of these barges were not officially part of the tonnage supply equation, but still lurking as latent tonnage that could be made employable if the freight market were to move higher. Now they are getting scrapped, and thus this dormant capacity is getting permanently withdrawn from the market. The implication is that should freight rates start jumping higher, there will be fewer barges available, which by itself can reinforce any freight rate rally even higher. This is even more critical as newbuilding capacity is presently not expanding given the higher newbuilding prices, and where the tonnage supply is getting tighter.
Higher steel prices are affecting the shipbuilders as they get fewer orders in this market. Further, it has been rumored that a few of the smaller shipbuilders that had not locked in their steel price cost immediately upon securing a contract may be in danger of defaulting on their contracts, or even defaulting out of the market altogether. This eventually will lead to fewer shipbuilders in the future, which, theoretically, will drive newbuilding prices even higher, other factors being equal.
From the financing point of view, there is a rash of some owners to refinance their assets at today’s higher asset prices.While interest rates are at historically lower levels, financiers seem to have taken notice of the current escalated prices, and they have become more cautious with their underwriting, especially for leasing transactions or transactions whereby the financier is getting exposure to residual values. In general, larger owners with better credit and financials tend to get preference when it comes to financing these days, as financiers do not want to take full exposure to the assets and their residual values—starting from such elevated numbers in today’s world—and they look for credit quality. Just like with the shipbuilders, current high asset prices favor bigger owners with the bigger fleets and balance sheets. This trend is favoring larger owners and players over smaller owners and is likely to continue for as long as asset prices remain high.
No one can predict how long the current rally in asset prices will last; commodity prices are expected to stay high for at least another year or so. However, the longer the higher the asset prices remain, the greater the advantage for the bigger players will be. If freight rates rally as well in the near future, it will reinforce such an advantage.
They say “don’t look a gift horse in the mouth,” and indeed, the present rally in asset prices is a blessing, allowing owners, small and larger, to benefit from a rising market. Their options are much greater in a strong market than in a weak market. Should a rally in freight rates occur too in the near future, both shipbuilders and equipment financiers would have more reason to benefit from the market as well.
Basil M. Karatzas is a marine asset and marine business appraiser, surveyor, broker and financial advisor. He is an accredited senior appraiser (ASA), accredited in business valuation (ABV) by AICPA, a certified marine surveyor (CMS-NAMS) and a fellow with the Institute of Chartered Shipbrokers in the UK. Karatzas is the CEO of Karatzas Marine Advisors & Co. and Karatzas Auctions.