Booming Market! 75-Minute Price Surge of ¥36.8 Million for This Bulk Carrier

Why Did "Hua Rong 5" Fetch Such a High Price?

The recent auction of the 52,000 DWT Supramax bulk carrier "Hua Rong 5" – built by Zhejiang Donghong Shipbuilding Co., Ltd. and delivered on May 21, 2012 – is now widely known. To recap: starting bid ¥76.6 million, final bid ¥113.4 million after 1 hour 15 minutes, representing a 48% premium.

Historically, ship prices have reached such elevated levels only three times before.

The first peak occurred in early 2005, driven by sustained economic prosperity. The second peak appeared during what we now recognize as a financial bubble—the artificial asset boom just before the 2008 global financial crisis, triggered by the U.S. subprime mortgage collapse. The third surge came in mid- and late 2010, marking a brief rebound following the 2008 economic crisis.

Since then, ship prices had never revisited those heights—until now. The auction price achieved for "Hua Rong 5" has effectively become the fourth historical instance of such a pinnacle.

Below, we analyze this phenomenon using VesselsValue's data and insights.

[Chart: 30-year age-adjusted valuation curve of "Hua Rong 5"]

*Age-adjusted: Fair market value at different time points excluding depreciation

What drove buyers' confidence?
Discounted Cash Flow (DCF) analysis reveals the required returns:
Assumptions:
• 100% equity investment (no leverage)
• Payback period: 5 years
• OPEX: $4,500/day with 1.8% annual increase
• Discount rate: 7.667%
• Charter commission: 3.75%
• Annual operational days: 350
• Other General Parameter

Results:
Ø 5-year payback requires average daily hire: $24,060
Ø 7-year payback requires: $20,600/day
*Conservative estimates; actuals vary with management

According to data from the Baltic Exchange, as of the time of writing, the Supramax spot market has seen a pullback from its peak. The high point was reached in late March at USD 23,458 per day and is currently at USD 21,177 per day, showing a slight upward trend even after the decline.

Meanwhile, the time-charter market peaked at USD 17,040 per day and is now at USD 16,620 per day.

It can be seen that the successful auction transaction reflects buyers' optimism towards the Supramax dry bulk shipping market, indicating high market sentiment at present.

Recent Market Review

1. Dry Bulk Shipping Trade

From 2015 to the present, global dry bulk shipping ton-miles have generally shown an upward trend. At the beginning of 2020, the outbreak of COVID-19—combined with the impact of the Chinese Lunar New Year—drove seaborne ton-mile demand down to levels last seen after the 2017 Spring Festival.

 Subsequently, as China’s effective pandemic control measures facilitated nationwide resumption of work and production, coupled with the Chinese government’s stimulus policies for new infrastructure projects driving demand for raw materials, ton-mile demand resumed sustained growth. A significant portion of this growth was contributed by Capesize bulk carriers transporting iron ore imports to Chinese domestic refineries for inventory replenishment.

However, the growth lasted less than a month before gradually returning to pre-surge levels.

[Chart: Orange bars = fleet growth; Blue line = cargo tonne-miles]

After the global outbreak of the pandemic, weak import demand suppressed shipping needs. As a result, in 2020, smaller commodity carriers—specifically dry bulk vessels below Panamax size (excluding Panamax itself), particularly Handysize and Supramax vessels—remained in a prolonged slump.

Beginning in late 2020, as global attitudes toward COVID-19 shifted from fear to acceptance (including the concept of herd immunity) and societies adapted to the "new normal," countries gradually resumed production and daily activities. The pent-up demand during the pandemic began to rebound, further driving maritime trade.

Additionally, the rollout of vaccines worldwide bolstered investor confidence.

Since the beginning of 2021, commodity prices have surged following the implementation of the U.S.’s new $1.9 trillion monetary stimulus ("money printing") policy. Meanwhile, Chinese local governments’ combined 40 trillion RMB new infrastructure stimulus plan has directly driven sustained long-term demand for bulk commodities.

As a result, we now see consistently growing ton-mile demand for Capesize bulk carriers transporting these commodities, accompanied by rising rates in both the spot and period charter markets. Similarly, FFA have mirrored this upward trend.

[Chart: Red = Capesize spot rates; Gray = 1-year FFA]

2. Vessel Value Changes

Handysize dry bulk vessel spot rates briefly hit a near-decade high in mid-March but retreated immediately after the peak and have been declining ever since. This peak now appears to mark the ceiling of the recent frenzied surge in rates. So, how have vessel prices fared during this period?

The chart above shows VesselsValue's two-year vessel price index trend. Both buyers and sellers in the secondhand vessel market have been riding high on the wave of rising freight rates. A prime example is the recent sale of Hua Rong 5, as mentioned at the beginning of this report.

In stark contrast to the depressed market of 2020, the overall value of dry bulk carriers has now surged by 37.13% year-on-year. When benchmarked against the historical median, the market value of Supramax bulk carriers—the sub-category to which Hua Rong 5 belongs—currently stands 18.1% above the median, marking another sharp reversal from the -15.5% recorded in November 2020.

However, the market waits for no one. As the saying goes, "Great times create heroes," and those who recognize opportunities amid crises and act decisively are the true heroes.

Back in mid-November 2020, Zhang Wensheng, VesselsValue's China representative, highlighted during the Global Shipping Finance Conference (hosted by Beyond Shipping) that this was the prime window for investing in dry bulk vessels, with Ultramax vessels being the most attractive (see report screenshot below)..

3. Fleet Development

Currently, there are only 253 ocean-going dry bulk vessels under construction globally. Even with the recent transaction of 10 Kamsarmax vessels, the total only reaches 263 ships. This represents just 2.27% of the operating fleet in terms of deadweight tonnage, and no more than 6% in terms of vessel numbers - the lowest proportion since 2002.

Vessels aged 5-15 years currently form the backbone of dry bulk shipping capacity. If current market conditions persist, the scrapping rate of older vessels (over 25 years) will slow down. Meanwhile, 228 additional vessels are scheduled for delivery within the next 12 months, further increasing fleet capacity. This batch of new vessels (approximately 270 ships) already has an average total deadweight tonnage equivalent to all vessels over 25 years old (about 490 ships), indicating a significant average increase in individual vessel carrying capacity. This is closely related to the design and optimization of new vessel types.

Compared with the current frenzy in the container ship newbuilding market (where orderbook TEU exceeds 10% of the operating fleet as of April 18, 2021), the dry bulk newbuilding market appears relatively quiet.

Without additional tonnage supply and assuming sustained international trade demand, freight rates would continue to rise. However, will reality maintain this trend indefinitely? The clear answer is: No!

4. Supply-Demand Dynamics

According to IMF forecasts, the global economic growth rate is projected at 5.5% for 2021 and 4.2% for 2022. India stands as the primary driver with a growth rate of 11.5%, followed by China at 8.1%. In absolute terms, China holds the top position.

According to analysis by VV and ViaMar: Despite the impact of COVID-19 and the implementation of regional lockdowns leading to slow production growth in early spring 2020, China's steel output still increased by 6% last year.

This growth was supported by major investment projects initiated by the Chinese government, as well as rapid recovery in end-user sectors, including automobiles and household appliances. Driven by investment projects totaling 40 trillion yuan nationwide, China’s steel production is expected to grow by approximately 5.0% this year, stabilizing at around 2-3% in 2022-23.

Beyond the diminishing effects of economic stimulus measures, Beijing maintains its stance that "housing is for living, not speculation." This policy direction may lead to the first decline in steel demand from the real estate sector in six years.

However, as iron ore inventories currently remain below the critical level of 1.5 months of forward consumption, demand for imported ore will continue to rise in the coming years. This is expected to partially offset the negative impact from the housing sector. Based on Vale's modest iron ore production guidance for 2021, we assume that any significant supply increase will primarily originate from Australia, followed by North America.

Regarding thermal coal, we anticipate that the current political tensions between China and Australia will ease after 2021, restoring traditional trade routes. Meanwhile, Indonesia has agreed to export 200 million tons of thermal coal to China in 2021. However, significant uncertainty remains over how China will replace Australian coal with alternative sources. Following a 1.5% decline in demand in 2020, VV and ViaMar forecast that grain, soybean, and other minor bulk trades will drive total ton-mile demand growth to 8-9% in 2021.

The shipping market still vividly remembers the frenzy of past booms and the pain of subsequent crashes. As a result, when another boom cycle emerges, industry players no longer rush in with speculative fervor as they once did.

Currently, only a dozen or so new vessels are expected to enter the fleet in 2022 and beyond. Meanwhile, IMO greenhouse gas emission regulations are set to take mandatory effect in 2023, likely prompting shipowners to adopt speed reduction—among other measures—which would further constrain available capacity.

Where is the next investment opportunity in dry bulk shipping?

It's a matter of perspective.

Most attention has been captured by the surge in containership orders. According to the latest VV Orderbook data, the majority of current containership orders are 10,000 TEU and above, with deliveries scheduled as late as 2028. Meanwhile, shipyard utilization rates have hit multi-year highs, which could also impact the delivery timelines for future dry bulk newbuilds. For dry bulk vessels, orders are expected to return to normal levels by the end of this year, with 2023 and 2024 shaping up to be the next wave of dry bulk newbuilding activity.

As for secondhand vessel investments, the old adage holds true: "Heroes are made by circumstance." Success hinges on seizing the right timing and opportunity—and believing in it.

Uncertainties surrounding COVID-19, trade wars, and oil price volatility remain key considerations. While economies are rebounding, the speed and strength of recovery—particularly in the West—may keep investors cautious. New containment measures are emerging in Europe, while progress in vaccination campaigns continues to bolster confidence in economic revival.