Dry bulk orders still at elevated levels, negative for shipping

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Investors can often gain insights into the dynamics of shipping industry supply and demand by following company ship purchases. IHS Global Limited provides purchasing data on a weekly basis, which is very useful for investors. Usually, when managers expect growth in ship supply to outpace shipping demand, they will be hesitant to place new orders. Thus, when placements of new ship orders fall, it is often a negative sign in the short to medium term, as it indicates a surplus of shipping assets in the market.

The dry bulk industry, an industry that hauls key raw materials such as iron ore, grain and coal, continues to face elevated levels of ship orders compared to years before 2006. Since our last data update for December 7th of 2012, orderbook as a percentage of existing capacity fell to 18.17% from 19.88%.1 At the same time, orders for dry bulk ships registered a decline of 27 to 787.2 These data points suggest that over the last two months, managers were still cautious about not enough growth in shipping demand to cover capacity growth projections over the next two years.

Although order levels moved up this week, suggesting a short term positive, they are still above levels seen before 2006 (before companies became very optimistic with trade growth). The orderbook has still not shrunk enough for analysts to estimate a supply and demand balance in the dry bulk shipping market over the next two years.

Until the industry sees lower order levels normalize, it is unlikely for the industry to resume ordering more ships. This will negatively affect dry bulk shipping companies for some time. These companies include DryShips, Inc. (DRYS), Eagle Bulk Shipping, Inc. (EGLE) and Diana Shipping, Inc. (DSX). While the Guggenheim Shipping ETF (SEA) also invests in other sub-industries of shipping (such as tankers that transport oil) and fundamentals may be more favorable for them, any upside will likely be capped for the ETF because dry bulk shipping still makes up 43% of the shipping industry’s revenue, according to IHS Global Limited. The SEA ETF is composed of tanker, dry bulk, drill ship, and container ship companies.

  1. See “Falling bulk carrier orderbook marks progression
  2. Orders are defined as purchases that have not commenced construction whereas orderbook also includes orders that are under construction