Dry bulk market players are putting earnings potential over asset values as they seek to capitalise on an exuberantly positive mood according to new analysis by MSI. Q1 2024 saw 250 sales recorded – the second highest quarterly total over the past 10 years – and age was no barrier to buyers with cash on hand.

MSI’s assessment of Capesize five year old prices – included in its latest quarterly sector report – reached an astonishing $60m in May, almost 20% higher than at the start of the year and the highest since 2010’s short-lived recovery following the 2008-09 global credit crisis. Current values compare very strongly against historical averages.

Older vessels are currently valued at an even higher premium over the corresponding long-term average than five year olds – the same comparison for 10 year old ships yields a premium of an average 63% across all benchmark sizes vs the average since 2010, and 15 year olds 68%, compared with an average of 57% for five year olds.

A major factor behind rising asset values has been the impact of very strong newbuilding prices, which have deterred owners from making orders for new ships. High prices and a large number of sales transactions suggests very high demand in the S&P market which in turn has propelled values to levels much higher than underlying vessel earnings would support.

Plamen Natzkoff

Indeed, it appears that the normally close relationship between earnings and asset values has partly broken down, leaving values are around 25-50% higher than earnings would suggest.

A low price to earnings ratio implies that either assets are undervalued, or earnings are expected to fall. This ratio has now risen to over 25 in Q2 this year (implying 25 years for current earnings to pay off the asset investment). In this case, it could be said that either the assets are currently overvalued, or earnings are expected to rise.

“There could be an element of truth to both these factors, but it should be no surprise that MSI leans towards the view that assets are currently overvalued relative to earnings,” said Plamen Natzkoff, Associate Director, Dry Bulk Commodities and Freight at MSI who added that the constrained supply side would see newbuilding prices remain high. “Although falling earnings will undermine asset values next year, the newbuilding market remains stubbornly tight and we have increased our expectations for 2025 newbuilding contract values.”

Source: Maritime Strategies International (MSI)