There were no strong positive signs in 1998 of a potential recovery in the Panamax market. The consequence of the Panama canal draught restrictions related to the El Nino weather pattern was a transfer of "current-contract" ships to the American West coast, effectively strengthening the Pacific market, and the promotion of Handymax vessels in the Gulf of Mexico, all other things being equal. The US Gulf / Japan route varied between a top rate of $18.50 per tonne and a low of $12.75 per tonne at the end of the year. Only the intra-Pacific and Far-East / Atlantic return rates were significantly firmer, benefiting from coal cargoes from Indonesia and Australia. The Panamax fleet has grown since the beginning of 1998, with almost 60 new units totaling approximately 4,400,000 dwt compared with 50 ships scrapped totaling 3,128,923 dwt.

The Capesize and Panamax Second-hand market

At the end of 1997 we observed that the impact of the Asian crisis was beginning to exert downward pressure on values and causing the shipowners to be very prudent, widening the spread between the price expectations of the buyers and those of the sellers.

1998 has confirmed and considerably accentuated this trend, buyers and sellers finding it difficult to make their expectations and views of the market coincide. A certain number of ships put up for sale were withdrawn when they did not find buyers at their asking prices.

Ship values dropped significantly throughout the year, although a relative - and, in our opinion, temporary -price stabilization could be detected during the fourth quarter.

From December 1997 to December 1998 the second-hand market was affected by two factors: a large fall in freight rates at the same time as a substantial decrease in construction prices. These two fundamental trends, affecting ship operating conditions and replacement cost, made the value of second-hand units fall considerably.

This price drop affected the oldest ships and modern units, whose value was directly threatened by the fall in construction costs.

In the case of old ships, approaching or about to reach decommissioning age, potential buyers consider that the crisis will probably last long enough to prevent values increasing before they are obliged to dispose of the vessel because of technical or commercial obsolescence. They therefore take this into account in the prices they offer to the vendors, as they are immediately confronted with low freight rates and a rather faint hope of any return on capital.

In the case of recent second-hand ships, the buyers naturally compare the prices asked by the owners with those proposed by the crisis-affected Asian shipyards, whose prices are set in devalued currencies (at least during part of the year) and which will deliver the ships at a time when it is reasonable to hope that the market will have recovered.

The dilemma for shipowners who were not able or did not want to sell in time is now to estimate how much they would lose - in their reference currency - with respect to their cost price (purchase on the second-hand market or order from a shipyard) if they sold today. They must also decide whether this potential immediate loss can be borne and whether it is preferable to a future loss which is likely to be much greater if the market continues to fall.

Moreover, they have to determine whether they have the resources to keep the vessel and to wait for the market to recover until acceptable values are restored, while accepting high operating losses in the meantime. Waiting for market recovery is a reasonable option for the most modern ships, but there is little hope that the values of the oldest ships will increase substantially.

As in all the previous crises and if, as we expect, this one continues in 1999, there will be purchasing opportunities for the healthiest shipowners with sufficient funds and retaining the confidence of their bankers.

Given the factors mentioned above and the fact that the Capesize market is essentially controlled by a relatively small number of specialist operators, capable of waiting for better days before selling, it is understandable that the second-hand market has been relatively calm since December 1997, with a sharp downturn in prices. We have recorded 27 sales (excluding sales for scrap) of ships of more than 80,000 dwt. However, it should be noted that four of them were refinanced on the basis of sales followed by long-term charters back to the sellers, two were sold-refinanced between Japanese companies and two have a deadweight tonnage of more than 230,000 dwt.

The majority of the buyers were Greek (16 ships) and most of the transactions were concluded end 1997/beginning 1998.

Prices have shown the following trend between December 1997 and December 1998 (million US$):

With the same causes producing the same effects, and although it is usually much more liquid, the second-hand Panamax market has also been severely affected by the crisis.

Some 35 Panamax ships of more than 60,000 dwt were sold for subsequent operation between December 1997 and December 1998 (this figure should be compared with the hundred or so transactions involving similar units observed between December 1996 and December 1997). Twelve of them were built after 1990.

The prices showed the following trend between December 1997 and December 1998:

We think that 1999 will be another very difficult year, with prices perhaps temporarily stabilized but most probably still heading down. We hope that in the case of further decreases in newbuilding prices the shipowners will resist the temptation of these attractive terms, otherwise the new capacity will not allow the market enough time to recover.

The Handysize market

The sluggishness prevailing since 1997 was accentuated in 1998. The 3/5-month Handymax rates rarely exceeded $8,000/day and finished the year slightly lower than in January, but still around $7,000/day in a Pacific market that was also slackening.

The 20,000-30,000 dwt market varied within a range from $5,000 to $6,000/day.

The Atlantic market was particularly slack, while intra-Pacific activity was more sustained, in particular on the spot market.

The rate reversal on Atlantic / Pacific routes was undoubtedly the most marked for the Handymax market. The dramatic fall in steel exports from Europe to Asia, while Pacific / Atlantic bulk transport intensified, profoundly altered the structure of trade between the two basins.

For example, the Europe / Far East route Handymax t/c rates, which were still negotiable around $11,000- 12,000/day on average in 1997 (in 1995, we were talking of $22,000/day), dropped to $5,000-6,000/day at the beginning of 1998, with a marked reduction in the number of transactions. In addition, the low volume of American grain exports resulted in heavy downward pressure on rates in the Atlantic.

Freight rates ex-South Africa (whose exports were boosted by the fall of the rand) to Europe consequently increased.

The operators who are traditionally very active in this sector lost interest in it. The positioning of ships in Europe became unprofitable, as the certainty of obtaining good outbound rates had disappeared. This affected the short- and medium-period market in the Atlantic.

In this context, and as predicted in 1997 with the Asian crisis, the Far-Eastern operators and shipowners, in particular the Koreans, forced to seek higher profitability, were very rarely aggressive outside their domestic and traditional markets. The Korean operators admit that their activity fell more than 50% in volume terms in 1998, after they had been omnipresent on the market in previous years.

The end of the year did not bring any hint of hope, quite the contrary. Japanese and Korean steel exports to the United States in turn experienced a marked slowdown following the introduction of new customs barriers. This made the spot market, all regions combined, mu ch less active, with shipowners assigning a higher proportion of their contract cargoes to their own fleets, a characteristic sign of a slack market with very low visibility. Industrial charterers, themselves forced to make substantial savings in all sectors, are applying a lot of pressure to the markets.

As far as the tonnage supply is concerned, this depressed market, perhaps in combination with the application of the ISM code, at least contributed to an acceleration in the scrapping of many old ships: 172 in 1998 compared with 124 ships delivered since the beginning of the year. The balance of the overall tonnage at last became negative, with 4,904,252 dwt retired from the fleet and 4,454,077 dwt delivered. It is interesting to note that almost 50% of the Handysize fleet in service is more than 20 years old. The scrapping potential therefore remains high. This is the only glimmer of hope in a 1999 market from which any optimism seems to be excluded.

The Handysize Second-hand market

As always in crisis periods, most transactions were made in the sector of the oldest ships, those more than 10-15 years old. It is effectively easier for the shipowners to accept reductions in value on ships that are partially or fully depreciated than on recently-built ships.

For example, at the beginning of the year a 40,000- 42,000 dwt vessel built around 1985-1986 still sold for $8-9 million, whereas $6.5-7 million was sufficient at the end of the year. In comparison, the price would have been $13 million in mid-1997.

The market for the youngest units has obviously fallen too low and too rapidly for their owners to consider such high losses within a few months. When the yen exchange rate weakened to 140 yen/$, some shipowners thought they could benefit from this opportunity to try and offset the drop in market value by currency gains, but this situation was so short-lived that the opportunities could not be taken.

Consequently, very few sales of recent ships were made. As far as we are aware, only four transactions were concluded for ships less than 10 years old. A 42,000 dwt vessel built in 1996 reached $20 million at the beginning of 1997, whereas a 43,000-45 000 dwt vessel built in 1994-1995 fetched only between $15 and 15.5 million in mid-1998 and at the end of the year.

The price of a 42,000 dwt vessel built in 1990 was around $11 million at the end of 1998, compared with around $16-17 million at the end of 1997.