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.
Managers have returned to purchase more orders
For the week ending June 28th, the number of dry bulk ships on order as a percentage of the existing number of ships rose to 9.69%, which is up from 9.50% the prior week—a sign that managers continue to be optimistic regarding the future supply and demand balance of the industry. This increase supports the view that the industry is turning around, which has helped push up share prices of dry bulk companies the first half of this year. Dry bulk orderbook as a percentage of existing capacity measured in deadweight tonnage (DWT), which includes ships under construction, also rose, adding 8 basis points (0.08%) to the prior week’s 16.74%, resulting in 16.82%.2
What does construction activity show?
For the same week, the number of ships under construction continues to fall: from 387 to 381 ships between June 21st and 28th. This is negative in the sense that managers are in no rush to receive these new orders and expect shipping rates and profitability to remain low for at least the short-term. Current data from IHS Global Limited shows that capacity growth remains elevated.
On the other hand, this will leave room for opportunity because between now and the time managers receive these new ships, shipping rates and profitability will likely rise, which will be positive dry bulk shipping companies, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Eagle Bulk Shipping Inc. (EGLE) and Safe Bulkers Inc. (SB), in the future.
Nonetheless, investors should review other drivers to see what is currently driving the dry bulk shipping industry. Some must reads are [Must-know: Shipping companies hit by China’s financial woes], [Low inflation supports availability of monetary stimulus, positive for shipping stocks], [Shipping capacity growth breaks below 7%, first time since 2009] and [Maturing contracts present significant downside for certain shipping firms].
© 2013 Market Realist, Inc.