Market Evaluation of Commercial Ships
By Mike Vaughn
Unlike automobiles with the “Kelly Blue Book” and to some extent pleasure yachts, which use the “Power Boat Guide”, commercial ships do not have a generally recognized common value reference source. The reason for that is that commercial ships have to be evaluated on a variety of different levels to ascertain a real market value.
There are several terms used in reference to the value of a ship. The two most common are “replacement value” and “market value”.
Replacement value refers to the costs of acquiring a new ship that performs and operates in the same style of the ship be evaluated. In determining what a replacement ship would be, the surveyor must ascertain the cargo or other capacities of the vessel, the crew requirements, any new governmental or classification requirements for the type of vessel and any changes in the portion of the industry in which the vessel will work. An easy example would be replacement cost of a major single hull oil tanker. Under most new regulations, the replacement vessel would be required to be a double hull vessel and consequently substantially more expensive.
What would be the acquisition costs of a new vessel identical to the one being evaluated? This figure is always representative of current shipyard prices and current labor and material costs.
Usually a surveyor or the person determining the “replacement value” will contact a number of shipyards capable of building such a vessel and ask for a general quote. The replacement value may be affected by any number of events.
The market dynamics will affect that quote in the same manner as market forces affect all quotes. If we assume that the ship being evaluated is an Offshore Supply Vessel in the 220’ range and the quote we requested at the height of the offshore boom of the mid-1990’s, the quote would not only be very high, but would reflect a waiting period before a position in the shipyard could be secured. Therefore, replacement value would be very, very high.
However, now that the offshore boom has subsided, shipyards are not under the type of demand that was there a few years ago, and the quote will reflect current market conditions in which a variety of shipyards would compete for the contact to build the ship. Therefore, the ultimate replacement price would be substantially less.
Replacement costs is one of the figures that may affect the “current market value” of a particular ship. If a new ship's costs is so high to make the purchase economically unproductive, the owner may consider substantial refitting of an older ship to keep the ultimate costs down.
CURRENT MARKET VALUE
Many of us, who produce these evaluations from time to time, wish that we had a crystal ball that would give us some help. Unfortunately, we have to rely upon our own experience in the market; our review of current business trends; knowledge and past experience and a good understanding of the capacities of the vessel in question.
The current condition of the vessel is of ultimate importance. The primary issues that should be used in evaluation a ship are:
- Classification status.
- USCG Certificates or other governmental certificates that are current.
- Condition of the hull.
- Condition of the primary propulsion unit.
- Condition of the auxiliary generators and equipment.
- Overall ability to perform the work required.
- Repaired damage to hull or running gear.
- Un-repaired damage to hull or running gear.
- Overall exterior maintenance.
- Special equipment or specially designed aspects of the ship.
- Current shipping market condition.
- Current financial market condition.
- Other potential shipping markets.
- Cost of replacement.
Age is usually the single most important aspect in value. All ships are built with an expected life of 20 to 25 years. After that point, their value declines substantially regardless of the condition of the vessel. Insurance rates generally begin to escalate and the level of maintenance and repair become more and more substantial with each passing year.
A vessel that is built to class and maintained in class by ABS or other recognized classification society will have greater value than a ship that has allowed the class certificates to expire. The loss or expiration of a load line will also decrease the value of the vessel.
Also, the fact that any certificate issued by the USCG, such as a passenger for hire or coastwise cargo certification, adds value if in full effect and decreases the value if expired.
The condition of the hull must be accurately ascertained by visual and audio gauged testing. Any wastage in the hull, above or below the waterline, signals the potential for great undiscovered damage. The fact that the class certificates indicate a hull in good condition is important. But in older ships, ordinarily, an audio gauge is the only way to determine the real condition. The audio gauge is a device that determines the thickness of the hull plate in a standard pattern over the entire hull. These measurements are then compared to the original thickness of the hull when built. A certain amount may be allowed for general wastage before it becomes necessary to re-plate. The amount of wastage is the important aspect to know.
A vessel with substantial hull wastage may not have value except as scrap.
The condition of the main engines and auxiliary are determined by examining and reviewing the maintenance records and logs. In many cases an oil sample will be sent for laboratory examination to determine the amount of wear inside the engine. In addition, engineers for the engine manufacturer can determine by inspection the amount of wear and potential for repair or continued use.
The next area we examine is whether the vessel is capable of performing the type of work required in the market where it is competing. If a vessel has been superseded by new designs and types of construction, its value will be diminished. Currently, there have been major changes in the offshore supply boat market, with a greater demand for larger vessels capable of very deep water work. As the demand for that larger size vessel increases the demand for the older, smaller boats will decrease and cause a loss of value in the older boats.
Also, in the cruise ship industry, a variety of new regulations concerning fire protection and security, cause older vessels to face substantial expense in meeting the new rules. Many times the cost of retrofitting an older cruise ship would exceed the cost of building a new vessel. So in evaluating the ship, you must consider how competitive will the vessel be in the current market and how long can it expect to remain competitive.
All ships suffer damage of one type or another. All repairs must be reflected in the log of the ship and all repairs must be to a surveyor’s or classification surveyor’s requirement. This assures the owner and any potential buyer that the repairs were made under severe scrutiny and resulted in the vessel being returned to its original condition.
When damage is noted in the log but not repaired, the value of the ship will suffer substantially. Generally this will occur when the damage is superficial and does not affect the operation of the ship. This will generally be seen in such things as dented plates in the hull, scraps in the paint, bent or rusted railings, etc.
However, when the damage is more than superficial and is not repaired due to the expense or difficulty in repairing the damage, the value of the vessel may be greatly impaired. The two features that affect the value are (1) buyer’s wariness of the costs of repairs and (2) the buyer’s concern about how the vessel will perform over a period of years. The buyer must also ascertain how the un-repaired damage will affect any class certificates or USCG certifications.
Overall exterior maintenance is a good indicator of how the owner maintains his ships. Usually the two areas that give the best “quick" look at the overall condition of the ship is the exterior paint and the engine room bilge. However, beware of that quick coat of cheap white paint that just hides years of neglect.
If a ship is designed with special equipment such as a loading device for cement or other bulk products or if it is compartmentalized for special cargo, those factors must be taken into account in evaluating the ship. A ship designed to haul high explosives or LPG may have a certain value based merely on its ability to do a specific job.
The overall condition of the shipping market must be taken into consideration in determining the value. If the market is booming and every ship is working, then the ship will have great immediate value. However, if you are in a slow or depressed market, such as the oil industry at the moment, then the value will be substantially less.
The ability of a buyer or owner to obtain financing is important. If the financial markets are booming and very involved in that particular shipping market, then financing will be easy and the ship will have greater value. The converse is that if the financial institutions are not lending to anyone, which is the case many times in the marine industry, that factor will greatly affect the ship’s value.
In evaluating current markets, both financial and shipping, you should also consider alternative markets. If a vessel can be relocated easily to a productive market and work competitively there, the value of the ship should reflect that fact.
Finally, the cost of replacement may become a major issue in determining the value of a vessel. Because of the Jones Act, all US shipping must be built in US shipyards. Consequently, a vessel, although older and needing repair, may still have substantial value when compared to the cost of building a new vessel in a major US shipyard. Sometimes the cost of upgrading and repairing an older vessel makes it a very lucrative proposition.
During the boom times in the oil fields, many, many older supply boats were taken out of mothballs and refurbished. They immediately found full employment and paid substantial dividends to their owners. The owners realized the delay in new construction compared with quick refits and lower overall investment in the vessel. Of course when the boom ended, the older, refitted vessel had little or no residual value. All of the factors must be evaluated and considered. The ultimate opinion is merely one person or one company's opinion. There is no absolute value on any vessel.