Ship prices to remain high

Hyundai Heavy Industries and its competitors will be able to keep charging record-high prices for at least two more years because rising demand has outpaced supply, shipowners said.

Executives at Varun Shipping Co., which has spent $320 million buying vessels this year, and at BW Shipping Managers Pte., which runs the largest privately held oil supertanker fleet, said they expect current prices to hold for at least two years. STX Pan Ocean Co., South Korea’s biggest transporter of iron ore and coal, said it may have to keep paying top dollar even longer.

Shipowners ordered $105.5 billion worth of new vessels last year, led by oil tankers, 37% more than a year earlier, according to London-based Clarkson. That exceeded the previous record of $76.3 billion spent in 2004.

“High ship prices are a concern, but as long as the premium on the new building price is absorbed into freight rates, it still makes economic sense for us,” Yudhishthir Khatau, managing director at Varun Shipping. Mumbai-based Varun has a fleet of 12 LPG carriers, making it India’s largest operator of such vessels. Some ship operators do not rule out a decline in prices if major economies slow down. Vessel prices fell to a 10-year low in 2002 and 2003 as falling consumer spending led to declining trade following the Sept. 11, 2001, attacks in the U.S.

Shipyards have raised prices for VLCCs by 67% since 2004 to an all-time high. The price of bulk carriers has increased by about 30% this year, according to Cho In Karp, an analyst at Seoul Securities Co. “There really isn’t any reason for ship prices to fall for the time being,” Cho said. “Shipowners will have to take into account that ships ordered now will only be delivered in four years.” South Korean shipyards have increased prices to pass on higher raw-materials costs, which wiped out about two-thirds of their 2004 earnings. They are paying almost three times more to suppliers in Japan for the steel plates used in ship hulls, and as much as 70% more to their main suppliers in South Korea.

The yards are also charging more to protect profits from a South Korean won that strengthened 29% against the dollar in the last three years, shrinking the value of contracts when converted into to the local currency.