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Capacity remains elevated while demand risk emerges for shipping companies

Why is capacity important?

Capacity is an important factor that directly impacts companies’ top line (revenue) in a highly commoditized industry, like shipping. When capacity grows faster than what’s demanded, competition rises among individual shipping firms as they try to use idle ships and cover fixed costs. This lowers day rates, which negatively affects bottom line earnings, free cash flows, and share prices for companies such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), and Safe Bulkers Inc. (SB).

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Capacity continues to grow ~7%

Dry bulk capacity, measured in DWT, grew 6.99% year-over-year for the last four weeks ending June 21, based on the latest data available from IHS Global Limited.1 Year-over-year capacity growth has hovered around 7.0% lately, after falling from near 10.0% at the start of the year. This is a positive development for the dry bulk shipping industry, but not enough to cover Jefferies’ estimated minimum dry bulk demand growth of 6.0% for 2013 earlier this year. RS Platou, an international ship and offshore investment bank, reported an increase of just 4.5% during the first quarter this year. As a result, shipping rates have remained depressed because of an elevated supply growth (see articles under Shipping Indexes for more information).

Risk of lower-demand growth rising

Although analysts expect economic growth to be stronger during the later half of 2013, shipping rates as well as utilization rates may be depressed for longer, given that the interbank repo rate for Chinese banks recently skyrocketed to a record and that prices for credit default swap insuring Chinese government bonds climbed (see articles under Macro Trends).

Shipping companies, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), and Navios Maritime Partners LP (NMM), are subject to further downside risks, as global trade grows less than capacity and shipping rates remain low (see the Shipping Indexes value driver for the most-up-to-date articles on shipping rates). Companies such as Safe Bulkers Inc. (SB) and DryShips Inc. (DRYS) are also subject to maturing contracts that are drafted out above current market levels (see contract value articles under Shipping Indexes for more information on maturing contracts). While the Guggenheim Shipping ETF (SEA)—which invests in the largest shipping companies worldwide—is also subject to low shipping rates, it may be less affected because some companies have valuable contracts that mature after 2015.

  1. DWT: a weight measurement that indicates the amount a ship can safely carry and transport across oceans.

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