A tool for smarter shipping investments

It is with eloquent timing, given firm demand for tanker services but few newbuildings on the orderbook, that the Baltic Exchange has brought attention to a range of its indices that, taken together, provide insight into the timing of investment in shipping.

Speaking about the Baltic Exchange Investor Indices (BII), Baltic Exchange CEO, Mark Jackson, said: “The driving force behind it was providing a simple data suite that allowed people to make informed decisions when investing in shipping.”

The new dashboard comprises: Health of Earnings Index; Residual Risk Index; Residual Value Index; China Newbuilding values; Second-Hand Value; Recycling Values; Implied Five-Year Timecharters; Spot Timecharter Values; and Daily OPEX.

The Health of Earnings Index is composed of the ratio of earnings against operating costs, while the Implied Five-Year Timecharters is calculated from forward curves in the FFA market (also published by the Baltic Exchange).

The Residual Value compares the written down cost of a five-year-old vessel with earnings on the basis of a five-year timecharter and adding back the operating costs.

The Spot Timecharter Earnings are derived from a basket of commonly traded routes for the vessel type. The Residual Risk Index is a ratio of residual value against recycling value that are assessed basis on the Asian Subcontinent (the closer the residual value to the scrap value, the lower the investment risk).

The Second-Hand Valuation is based on the weekly assessments of a five-year-old vessel by leading S&P brokers. With these indices in place, many of the tools were in place to assess investment. All that was missing was operating expenses (OPEX).

This was completed with assessments made by third-party shipmanagers who quote OPEX budgets for owners’ business every day, not backward looking or an assessment by the owner’s accounts department. Five managers that currently make the assessments (Anglo-Eastern, Columbia Shipmanagement, Synergy, Fleet Management and V.Group) collectively provide technical management services to a fleet of more than 2,600 vessels, including bulkers and tankers, as well as a broad range of other vessel types to add context to their assessments.

The Baltic Exchange’s OPEX assessments for each vessel type is broken down into three main areas: crewing; insurance; and technical (stores, repairs, expenses and management fees). While the indices also include dry docking costs, these numbers are amortised over five years and published separately so do not contribute to the assessment.

The four major tanker sectors are covered (VLCC, Suezmax, Aframax and MR product tankers), with a standard specification of a nominal vessel from each category of being five-years old, non-Ice-Class and not fitted with scrubbers.

The BII serves several purposes. Taken as a suite, it can be used at a high level to produce insights such as the disconnect between relatively firm asset values and poor freight rates, as analysed by global maritime shipping capital structure consultancy Zuoz Industrial principal Urs Dür in a series of papers made available on the Baltic Exchange website.

Or at a more granular level, to assess changes in insurance costs. “It is an easy, cheap access point to the Baltic Exchange data,” said Mr Jackson.