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The orderbook is an indicator used to assess future supply in the shipping industry. It is an indicator that can help investors and analysts foresee emerging risks or opportunities. When the orderbook level for a specific ship class is high, it often has negative implications on shipping rates. Lower shipping rates will lower earnings and free cash flows for dry bulk shipping companies that haul raw materials, such as iron ore, grain and coal.
Panamax class ships at the front of the race to add capacity
Based on the latest information available from Pareto, new deliveries in 2013 are expected to add more than 10% to existing capacity for each individual class of shipping class. What stands out the most is the ~22% expected increase in panamax vessels, which is the second largest class of dry bulk vessels that primarily haul iron ore, coal, and grain.1 The exceptionally high growth rate for panamax supply will keep panamax shipping rates capped through the medium-term future as it leaves less room for demand growth to outpace supply.
The 22% projected increase in panamax vessels in 2013 can have varying impacts on different dry bulk shipping companies’ revenues, because each firm’s ship composition is different. Knightsbridge Tankers Ltd. (VLCCF), for example, carries no panamax vessels. Companies that will be directly affected by lower panamax spot rates are DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB) and Paragon Shipping Inc. (PRGN).
Shipping rates often move in tandem
It should be noted that shipping rates for different ship classes move in tandem to each other. This is because if one class of ship is oversupplied, the lower rate of that ship class will attract customers away from using other ship classes, which will lower their shipping rates as well. Thus, no shipping firm is perfectly immune to the large number of new ship deliveries for panamax size ships in 2013. The Guggenheim Shipping ETF (SEA), Eagle Bulk Shipping (EGLE) and Knightsbridge Tankers Ltd. (VLCCF) will inevitably be negatively affected in 2013.
© 2013 Market Realist, Inc.