Cancellation for 79.5k dwt bulker. Cosco announced that it received a cancellation request from an Asian shipowner for a 79.5k dwt bulk carrier contract. Construction of the vessel, which was supposed to be delivered in April 2012, commenced in early 2011. The shipowners agreed to pay a lumpsum penalty in addition to the deposit.
Case specific cancellation. We understand that the shipowner in this instance is a shipping JV, where the partners decided to scrap the investment; the companies were not facing any risk of bankruptcy. We believe this is a one off cancellation as it is rare for shipowners to cancel an order during construction. Cancellation costs are high given the forfeit of a 20% deposit plus a 5-10% penalty on top.
Not a bad deal. We estimate the contract price to be c.US$50m. This means that Cosco could lock in an immediate gain of US$12.5-15m for the cancellation. In addition to this, we believe it makes sense for Cosco to continue building the vessel for a spot sale for the following reasons:
1) To maximise of yard capacity and efficiency
2) It should be easy to find a taker for this 79.5k dwt vessel, which happens to be a main stream product.
3) Spot sales generally command better pricing as new orders are delivered from 2013 onwards. This could allow Cosco to achieve better margins for the vessel. Note that the deposit and penalty has offset the decline in new build prices (30% from peak prices in 2008), hence, any upside from current levels will be in the form of incremental profits.
4) Timing is favourable as BDI is expected to rebound and disruption of Japan’s shipbuilding capacity following the recent earthquake and tsunami may reduce new supply into the market in 2011.
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