At last month’s Maritime CEO Forum in Monaco, John Michael Radziwill, who heads up C Transport Maritime, posited that normally shipping cycles work whereby orders flood in when the price of a five-year-old ship exceeds a newbuild cost. Right now, there’s still a gap, 83% for capes, 85% for panamaxes while supramaxes are at 97%, he said, focusing just on the dry bulk trades. Are shipping cycles that easy to assess? Experts contacted by Splash Extra have plenty of caveats to Radziwill’s theory. Dr Roar Adland, head of research at broker SSY, has written a couple of papers on the maths behind the symbiosis between newbuild and five-year-old prices over the years. “It’s a bit more complicated,” he tells Splash Extra. “It depends on many factors, most notably delivery times, but also interest rate levels, the payment schedule in newbuilding contracts, credit risk in time charters, etc. Simple rules of thumb therefore do not necessarily work over time.” The main idea, according to Adland, is that the players in the two markets – newbuild and S&P – are the same, and they are also highly integrated in terms of pricing. Like Adland, Dimitris Roumeliotis, who works in the research and valuation department at Greece’s Xclusiv Shipbrokers, has spent considerable time studying the relationship between the ratio of the price of a five-year-old vessel to a newbuild and the orderbook evolution. “The idea that when these prices converge, it signals a surge in newbuilding orders, holds some truth, but the reality is far more nuanced,” he says. Several other factors, including economic conditions, market outlook, fleet renewal needs, and regulatory changes, play a significant role, he says. Historically, when shipyard orderbooks are burgeoning with long lead times, combined with strong sector earnings, secondhand prices for modern vessels often rise above equivalent newbuilding contract prices. The primary rationale behind this price crossover is that buyers aim to capitalise on elevated market cash flows immediately with assets on the water rather than waiting over two years to take ownership of a new vessel from the yard. If the owner chooses to go down the newbuild route by the time they eventually take delivery of the vessel, the markets could have moved on, and a lower stage in the earnings cycle would prevail. “The stronger the earnings, the greater the premium buyers are willing to pay for secondhand tonnage compared to newbuilding prices,” explains Dr Adam Kent, the head of Maritime Strategies International (MSI). “Similarly,” he adds, “the higher the earnings the older the vessels owners are prepared to buy, that still attract a premium over the equivalent contract price.” For example, at the height of the shipping super boom in 2008, 10-year-old capesize vessels traded at a 20% premium to prevailing newbuilding prices, due to exceptionally strong earnings. More recently, during Q2 2022, 15-year-old traditional panamax containerships achieved a 25% premium over newbuilding prices, driven by extraordinary earnings potential. Ironically this was a sector largely written off by many market participants six years earlier. Source: VesselsValue Ralph Leszczynski, who heads up the research and consultancy department at Banchero Costa, acknowledges the importance of the price gap in assessing cycles, but argues that it also depends on how market participants view the longer term compared to the present. A secondhand ship delivers quickly, whereas orderin