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Falling bulk carrier orderbook marks progression

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The bulk carrier orderbook is a useful indicator to show changes in supply and demand in the dry bulk industry. The dry bulk industry ships primarily coal, grains, and iron ore to various ports across the ocean. The indicator will often fluctuate within a certain range. When the orderbook rises significantly above the normal range, it is generally an indication of stressful times ahead.

The bulk carriers orderbook is expressed as a percentage (%) of total deadweight (DWT) in service, which represents operating capacity. Deadweight, or DWT, is a measurement of the weight that ships can carry. Through the week ending December 7th, 2012, orderbook fell 0.22% to 19.88%, approaching levels not seen before 2007. Although this is a good sign long term, it is also an indication that fewer ships are ordered, which suggests flagging demand in the short term. There are two main reasons why orderbook levels tend to fall:

  • First, as new ships enter the market, the total capacity in service rises, putting pressure on rates and shipping margins.
  • Second, companies are unlikely to replace existing orders with new orders when they expect current orders will be enough to fulfill demand over the next three years, since it takes about three years to build a ship.

While there are other metrics that investors can use to assess the fundamentals of the dry bulk industry, orderbook level is generally considered to lead other value metrics in regards to supply side dynamics. If the orderbook level continues to fall further from this point, and demand grows at an above historic average rate, we may begin to see some life in dry bulk shipping rates and equities, including DryShips, Inc. (DRYS), Diana Shipping, Inc. (DSX), Eagle Bulk Shipping (EGLE), and Euroseas, Ltd. (ESEA). The Guggenheim Shipping ETF (SEA), which invests in major shipping companies world-wide, will also benefit. This may happen sometime in late 2013.

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