<

Why you should watch 7 key industry indicators for shipping fundamentals (Part 2)

Continued from Part 1

Legal ApologiesEnlarge Graph

The importance of ship orders

Ship orders reflect managers’ assessments of the shipping industry’s future supply and demand balance. Dry bulk shipping companies will often place new orders when they expect future demand to increase more than supply, on the condition that they expect to generate profits with new vessels. Since dry bulk ships usually take one to two years to construct, ship orders apply most to long-term investment horizons.

Ships on order rise to record in 2013

For the week ending July 5, the number of dry bulk ships on order as a percentage of the existing number of ships jumped to a record high of 10.27% since the beginning of this year—an addition of 0.41% to last week’s 9.86% figure. The dry bulk orderbook as a percentage of existing capacity measured in deadweight tonnage (DWT, the weight that ships can safely carry on water) also rose, adding 60 basis points (0.60%) to last week’s 17.01%, which results in 17.60%.

Until recently, new orders have remained depressed due to a record backlog of new ship deliveries. Because supply was growing faster than demand, which meant lower future shipping rates, managers refrained from placing new ship orders. The rebound we’ve seen in new orders is a sign that managers see much of the large backlog has been cleared through and expect demand to outpace supply growth. Diana Shipping Inc. (DSX), for example, has been purchasing several ships in the secondary market in anticipation of higher shipping rates.

Implication for dry bulk shipping outlook

A higher expected growth rate in demand relative to supply is positive for shipping rates because it translates to higher margins and earnings for dry bulk shipping companies such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Knightsbridge Tankers Ltd. (VLCCF), Safe Bulkers Inc. (SB), and Navios Maritime Partners LP (NMM). However, since dry bulk vessels can take up to two years to construct, managers likely expect shipping rates to improve over the long term. Short- to medium-term fundamentals may still differ.

Learn more about the seven key shipping indicators

Continue back to Part 1 to see the list of other key shipping indicators.