EXPLICACION DOS TOTAIES:

The ship’s sale and purchase market (hereinafter S&P market) is a sizeable commodity market due to the fact that the assets of the company could always change their value; either appreciating or depreciating following the trend of the freight market. The S&P market

Figure 1 Comparison between world GDP and freight rates

49 is derivative of the main transport undertaking. It is important however to consider its influence in order to establish reliable indicators for abuses that relate to limitation of investment.⁷² As aforementioned, any vessel, apart from being the business lever for the maritime companies, is also a commercial asset. Thus the variations in supply and demand determine also the value of the assets of the market company, affecting all financial operations and especially mortgages and loans. On the one hand, bankers and other lenders are very interested in the market-value of the ships because the mortgage on the hull is the primary collateral for their loans. On the other hand, brokers, shipowners or even bankers attempt to predict the variations in the S&P market in order to profitably trade their assets (i.e. the vessels).

From the shipping company’s point of view, any fluctuation in the price of their assets has a direct impact, not only on credit availability (and consequently the issue of cash-flow), but also on share price.

Obviously, selling a ship when the market cycle is low can turn out to be not beneficial enough. However, as mentioned above, this decision could be made on the grounds of serious cash flow problems.

Given that the price of a vessel is influenced by its capacity to provide income for the company, any disability of the vessel has a direct impact on the freight rates. When freight rates are low, and liquidity is possibly limited, the seller (who can be a shipowner or a banker who foreclosed on his client and took possession of the ship) might be forced to sell the ship in order to pay off debts. From the buyer’s point of view this may appear as an opportunity to make a profit out of speculating on the S&P market.

The S&P market defines shipping not only as a pure corporate business, where serious companies draw a twenty year project and follow it, but as a highly speculative and volatile market, where a spot

72 See infra sections “2.2.1.7.1 Capacity Changes and Adjustments in Relation to Time” p.128 and “2.1.2.2 Limitations of Technical Development and Investment”

p. 76

50 small sized bulk carrier company can be as much more successful than an established PLC⁷³. The essential part of this market is that it is correlated primarily with the freight rates. When the freight rates are high, it means that there is a great demand for services, that even an older vessel can be utilized; sometimes a second hand vessel of the same tonnage may worth more than a newbuilding, as several additional factors determine its price, e.g. draft, breadth, canal design (panamax, suezmax), fuel consumption, construction quality, equipments and engines etc..

As freight rates are the primary influence on a ship’s prices, ‘peaks’

and ‘troughs’ in the freight market cycle are transmitted into the sale and purchase market. The relationship is very close, especially as the market moves downwards. We will depict the issue of the S&P market by presenting three tables that exhibit the volatility of the price in the value of ships.

In this figure two

facts are

presented:⁷⁴

First, it depicts the relative

synchronisation of the submarkets and their segments.

Second, it shows the relatively high volatility of the market over a thirty year period.

73 While corporate players may seem to occupy a better position in dealing with crisis than small and medium spot shipping companies, this conception is not true;

the key point to success in the shipping business is often the ability to infiltrate and penetrate into demanding and competitive markets. Making a better bid (in this context, an offer of lower rates than that of the competitors), where high freight rates are absolutely essential for the continuity of the medium-big shipping firms, burdened with loans in the form of bonds, secures the life of smaller shipping companies and may place competitors in difficult situations.

74 Stopford, 2009, op. cit, p. 202, apud. Clarkson Research Services Ltd.

Figure 2 Comparative vessel price cycles for Bulk Carriers (BC) and Motor Tankers (MT).

51 It is worth noticing the cyclic behaviour of the market and the dramatic increases of price that in some cases reach seven hundred per cent (700%) within four years (note between 1986-1990 the price of 280,000 dwt tankers). The phenomenon of synchronisation is observed in the same intensity among various categories of vessels, as they follow the linear trend over the X axis (depicting years). Cyclic behaviour overlaps the usual twenty five year lifespan of a vessel, a fact that undoubtedly affects the financial situation and planning of a shipping company. Within the following graph we illustrate the deviation from the linear trend value, fitted by regression, in a Panamax (65,000-80,000 dwt) bulk carrier from 1976-2004.

Figure 3 Deviation from the market price of a Panamax BC.

As we see from this figure⁷⁵, the linear regression trend estimation between 1977 to 2006 shows noticeable deviations; in three cases these deviations are extreme, e.g. we see that the deviation within only two years, between 1981-1983 was 140 per cent and progressed even more sharply (150 per cent overall, if we calculate 1983). By the same token, between 2002 and 2006 we see an astounding 160 per cent deviation; this trend continue even further in 2007. The reason that is

75 Stopford, (2009), op. cit, p. 203, apud. Clarkson Research Services Ltd.

52 responsible for this dynamic linear trend is the volatility of the freights. In the figure below we examine the correlation of a second price vessel with freight rates.

Figure 4 Correlation of second hand price vessels and freight rates

With this figure I support that, in the 30 year period shown, correlation between the one year timecharter and the price of a five year panamax bulk carrier was 0.73, suggesting that 73 per cent of the variation in prices can be explained by earnings. Yet again, despite the volatility of the freight rates, we observe the synchronisation effect throughout the examined period.⁷⁶ Thus, after careful consideration of the above statistical data, I observe a clear correlation between freight rates and a vessel’s value. It is also presumed that there is a six to twelve month response time between the two markets.

Hence I argue that the S&P market is composed of the same ingredients as the freight market: high volatility and high speculation.

In addition to the factor of the freight rates, the age of the ship has to

76 Kavussanos Manolis G., “The dynamics of time-varying volatilities in different size second-hand ship prices of the dry-cargo sector” Applied Economics v 29 [April 1997] p.433-444

53 be taken into consideration.⁷⁷ In addition, the methodology of calculating the residual value of the ship follows the same pattern.

In this context, the shipowner is always faced with the following issues:

i) The market value of the vessel in the future;

ii) The ability to secure finance due to managerial reasons (atomicity, shipowner’s personal age, size of its existing fleet);

iii) The choices between ordering a new vessel or selecting a used one, based on the market situation⁷⁸.

In view of the business dilemmas mentioned above, there are two ways of calculating the residual value of the assets of the maritime company; an exercise that is important in order to establish the parameter of market dominance:

The first way, as applied by economists, is to take into consideration annual inflation, and the age depreciation and deduct them from the linear trend of the annual three-year cycle prices of the newbuilding market; plus the book value. Taking all the above into consideration one can re-adjust the ship’s book value to meet market trends.

The second method is based on the assumption that the ship usually has a 25-30 year life span. It also has residual scrap value, which again is subject to volatility. Nonetheless, it represents an easily assessed variable, as scrap prices are more predictable and the demand for good quality steel is never lower than expectations. Thus, by dividing the aforementioned aggregation with the addition of the scrap price per year, one can conclude what will be the future price of

77 It is implied that after the standard depreciation after 5-10 years of operation, depending on the vessel of the ship from the trend line, the whole ship’s value is estimated after the evaluation certificate from the special brokers.

78 The questions above are not relevant to the management of a shipping company, but they have a serious impact with regard to the establishment of the dominance position (see chapters three and four).

54 the vessel. However, as the figures above indicate, one has to take control of the market cycles; thus, the overall amount is subject to 70 per cent variation if the most extreme price movements are taken into account.