John Fredriksen’s bargain VLCC order in China shows a perfect storm is brewing for shipbuilders and is potentially bad news for tanker asset values, observers believe.
TradeWinds reported in last week’s print edition that the tycoon had penned a pair of VLCCs at Jinhai Heavy Industry, with options for two more, at less than $78m each.
Brokers note that given Fredriksen’s history with the yard, which includes cancellations and legal disputes, there may be more to the price than initially appears in black and white.
“A perfect storm brewing for yards as we see the second half of 2016 as the likely inflection point when smaller yards either conclude new contracts at a loss or reduce capacity, or potentially close down,” said analysts at DNB Markets.
In a report Nicolay Dyvik, Oyvind Berle and Petter Haugen say it’s too early to reach firm conclusions based on one reported deal, but suggest lower newbuild prices are likely to weigh on second-hand prices and tanker stock valuations.
“We note what we learned from LPG: one quarter of normalised rates made the VLGC resale premium to a newbuild disappear,” they wrote in a report.
“Hence, if we were to make any preliminary conclusions, a Korean-built VLCC resale price is likely to decline from the current $95m to $85m, in line with the Korean equivalent newbuild price based on the Chinese quote (usually 10% premium), leaving 10% downside potential to VLCC resale prices.”
Amit Mehrotra of Deutsche Bank says the price Fredriksen has paid is a 10% markdown from the last comparable deal placed in 2015.
“The development has potential negative implications for asset values and supply growth beyond 2017, in our view, though we’d have to see more of such activity to get overly concerned,” he said.
Fotis Giannakoulis of Morgan Stanley, says should the price be confirmed, “it would have negative implications on all tanker stocks NAV” given the $91.5m value Clarksons ascribes to a Korean built VLCC.
