A Look at VLCC Newbuilding Pricing
Aug. 5, 2022
Our model used to forecast newbuilding asset prices relies upon a multi-variate approach including a McQuilling-developed forward steel index, prevailing and projected market earnings, as well as yard capacity and long-term interest rates. The advantage over traditional methods of correlating asset prices to earnings is that the model can explain to a reasonable degree situations where newbuilding prices may be performing differently than earnings would suggest, which have a much better correlation to secondhand prices. This was perhaps never more evident than the last 18 months, as newbuilding VLCC prices continued to trend higher from commodity inflation and exuberant ordering of containerships and project-based LNG carriers, all while the prevailing earnings environment was well below average.
Currently, our forward steel index reveals a deepening backwardation as fears of a prolonged recessionary environment reduces demand expectations for underling commodities. In parallel, global yard capacity remains tight from LNG carrier and Containerships, although the multi-quarter lull in tanker and bulker contracting has help alleviate the tightness to some degree. We anticipate tanker ordering to remain low, particularly for larger-sized tonnage in the short-term, while at the same time, reports of containership cancellations will continue to loosen yard capacity in the future.
As we look forward, our models predict a possible correction in Newbuilding prices as we move into 1H 2023; a timeline we first revealed in our January Tanker Market Outlook publication and re-affirm today. In addition to easing input costs and increasing yard capacity over the next 6-12 months, central banks are sharply increasing interest rates to counteract inflationary pressures. As a result, we have observed the closely watched 6-month LIBOR rate, a common proxy for ship finance, increase from 0.16% a year ago to 3.31% this week. Assuming standard 60% debt financing, a VLCC ordered at US $100 million, would carry an additional US $3,600/day in capital costs due to interest rates alone.
This multi-faceted development of high newbuilding prices from elevated steel prices and tight yard capacity along with higher break-evens are without doubt a very positive sign for tanker owners going forward. While we could not predict the Russia/Ukraine situation back in January, we reiterate our view for a moderately improved VLCC earnings environment in 2023 and significant upside risk to earnings in 2024 and 2025. In this scenario, will asset prices continue to march higher or has the price appreciation been front-loaded due to high replacement costs? Stay tuned for our latest asset price forecasts in the August Mid-Year Update of our 2022-2026 Tanker Market Outlook publication series.
Share
Comments
You need to login to comment.
