Ship orders apply most to long-term investments
Ship orders reflect managers’ assessments of the industry’s future 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 vessels.1 Since dry bulk ships usually take one to two years to construct, ship orders are most applicable to long-term investment horizons.
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Vessel order update for June 21
For the week ending June 21, the number of dry bulk ships on order as a percentage of the existing number of ships rose from 9.35% the prior week to 9.50% this week—a sign that managers are still optimistic regarding the long-term prospects of the industry. This increase supports the view that the industry is turning around. Dry bulk orderbook as a percentage of existing capacity measured in deadweight tonnage (DWT) also rose, adding nine basis points (0.09%) to the prior week’s 16.65%, resulting in 16.74%.2
Yet, while the number of ships on order rose weekly from 804 to 818 ships, the number of ships under construction continued to fall, from 392 to 387 ships. This decrease suggests that managers are in no rush to deliver the ships for service.
Maintained cautious outlook
Although it’s encouraging to see ship orders returning to normality, investors should be cautious. While several shipping companies rose in share price during the first half of the year due to optimism, year-over-year capacity growth remains elevated. This elevation has a negative impact on companies’ revenues, earnings, and free cash flows (see our Fleet Utilization driver for the most up-to-date information and analysis on capacity growth). These companies include DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Eagle Bulk Shipping Inc. (EGLE), and Safe Bulkers Inc. (SB).
Furthermore, the latest data on credit default swap price for China’s government bond and the country’s interbanking repo rates point to a negative short- to medium-term outlook for the largest dry bulk purchaser’s economy. You can expect dry bulk shipping rates to remain depressed, at least in the short term (see Shipping Indexes for more information), and several valuable contracts will roll over through the next couple of months. DryShips Inc. (DRYS) and Safe Bulkers Inc. (SB) will be most negatively affected by those maturing contracts, while Diana Shipping Inc. (DSX) is least subject to them (see contract value articles under Shipping Indexes). While the maturing contracts will also negatively affect Guggenheim Shipping ETF (SEA), which invests in several large shipping companies, the effect is minimized through diversification.
© 2013 Market Realist, Inc.