Dry bulk shipping companies lag behind economic recovery
Despite the U.S. stock market surpassing its 2008 highs recently, with the Dow Jones Industrial Index hitting 15,544 and S&P 500 hitting 1,692 as of July 19, 2013, dry bulk shipping companies have done poorly over the past five years. These companies primarily transport raw materials such as iron ore, coal, and grain across the ocean. China is the major destination for these shipments.
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While a recovery in shipments growth following the worldwide stimulus injection at the end of 2008 and in early 2009 has supported share prices throughout 2009 and 2010, industry overcapacity has remained problematic for the shipping industry. This difficulty is due to the large placement of new ship orders by shipping managers who expected global trade growth to continue at a rapid pace. As a result, share prices of shipping stocks had nowhere to go but down the drain. Many retail investors have thrown in the towel and will likely never consider investing in shipping companies again.
But the dry bulk shipping industry is attracting renewed interest, with top analysts expecting a turnaround either this year or early next year. To answer why, we must look at supply and demand growth over the next few months. Below are some of the key indicators that reflect supply and demand:
Importance of supply and demand
Supply and demand of ships are the most important factors that affect shipping rates, which in turn affects earnings and share prices in a highly commoditized industry such as shipping. Unlike Windows and Apple, which have features that set them apart from each other beyond price (think design, versatility, and compatibility), the shipping industry offers little differentiation between companies, so shipping firms rely most on rates. That’s why supply and demand are so important in the industry, because they affect shipping rates. When supply growth outpaces demand, competition among shipping firms rises, which leads to lower shipping rates. On the other hand, if supply growth can’t meet demand growth, customers will have to pay higher rates to transport goods across the ocean. The latter case is negative for customers but positive for dry bulk shipping firms, because it increases profitability. Higher profitability will often drive share prices higher.
We update these indicators regularly on Market Realist’s website as new data becomes available. Explore the links above to learn more about the seven key shipping industry indicators and why you should watch them.
© 2013 Market Realist, Inc.