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Dry bulk shipping at inflection point, order trend remains positive

Dry Bulk Vessel OrdersEnlarge GraphShip orders are useful metrics in uncovering managers’ perspectives of the industry’s long-term demand and supply balance. Dry bulk shipping companies will often place new orders when future demand is expected to increase more than supply, on the condition that they expect to generate profits with new bulk vessels.1 Since dry bulk ships usually take one to two years to construct, ship orders are more relevant to long-term investment horizons.

Dry bulk shipping at inflection point

For the week ending May 10th, the number of dry bulk ships on order as a percentage of existing number of ships rose slightly from 9.05% the prior week to 9.06% this week. While the measure has fallen from its recent high of 9.31% on April 19th, it is encouraging to see that the indicator has not fallen below the low of 8.94% this year, suggesting managers are still optimistic in regards to the long-term prospect of the industry.

However, the dry bulk orderbook, which includes ships under construction, continues to remain weak. Last week, the measure fell from 16.58% to 16.50% as a percentage of available capacity in dwt (a measurement of how much a ship can safely carry on water). A falling orderbook is a short-term negative for shipping companies because it suggests industry supply grew more than the number of new orders that shipping companies have placed.

Expectations for short to long run

Shipping rates will likely remain low in the short run as new vessels are delivered for service (see Stabilizing baltic rates support upsides, short term risk remains), which is negative for shipping companies, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM) and Safe Bulkers Inc. (SB). In the long run, however, the industry should emerge from depressed earnings levels. Several managers have begun taking advantage of low vessel prices in anticipation of higher demand in 2014 and onward.

Diana is best positioned to take advantage of an industry recovery because most of its near-term maturing contracts are settled at current market rates. If shipping rates rise, Diana will be able to capitalize on higher contract rates. If shipping rates fall or stay constant, it has less to lose compared to other firms with more valuable contracts, which provides a favorable asymmetric return to risk opportunity (see Why Diana will outperform Safe Bulker and Navios Maritime for details).

Investors can alternatively invest in the dry bulk shipping industry through the Guggenheim Shipping ETF (SEA). The ETF performs similar to the Dow Jones Global Shipping Index by investing in large shipping companies worldwide. It has also outperformed other industrial sectors, such as coal and steel, this year.

  1. Dry bulk shipping companies engage in the transportation of dry raw materials, such as iron ore, coal and grain across water.