Falling ship construction activity points to lower supply ahead
Ship construction activity
Ship orders reflect managers’ expectations for future supply and demand differentials. But new ship orders don’t always translate into new constructions right away. Sometimes, shipping firms specify a particular date of delivery for the new orders. If the delivery date is farther out, ship construction firms will delay work. So construction activity, on top of ship orders, gives investors further insight into managers’ expectation of future supply and demand differences as well as when and by how much supply will grow in the future.
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Construction activity travels farther south
On August 23, the number of ships under construction as a share of existing vessels continued to slump. Using the last four weeks of data to smooth out short-term noise, Capesize construction fell from 3.29% to 3.23%, Panamax construction fell from 6.26% to 6.20%, and Supramax construction fell from 3.32% to 3.30%. The overall indicator also fell from 4.32% to 4.31%.
Like what we saw in ship orders, Panamax vessels continue to show an elevated level of construction activity. This confirms that Panamax vessels will continue to see the largest increase in supply this year, which could negatively affect Panamax rates. On the other hand, we saw a jump in construction activity for Supramax vessels in April, which explains why Supramax orders fell around the same time. Construction activity for Capesize vessels also remains in a downtrend. So while we might say all is bad for Supramax vessels, the jump we saw in April may point to optimism among companies focused more on minor bulks.
Lower construction activity: Positive or negative?
The weakness in construction activity suggests managers aren’t in a hurry to receive orders for new ships and expect shipping rates as well as profitability to remain low for at least the short term. Still, fewer ships under construction would lead to lower supply growth in the future—which would be good for capacity growth. So, depending on the context of other variables, construction activity could either be a positive or a negative for firms such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc. (SB). In 2014 and 2015, several analysts expect shipping capacity to grow by just 2% to 4%.
Disclosure: I own shares in Diana Shipping Inc.