The importance of ship orders
The number of ships on order reflects managers’ expectations of future supply and demand differences. When they expect future supply to increase more than demand, managers will refrain from purchasing new ships. However, when they expect demand to outpace supply growth, companies return to the shipyard to place new orders, on the condition that they expect to generate profits with the new vessels. So rising or high levels of ship orders often indicate that shipping rates will rise. Since dry bulk ships usually take one to two years to construct, the indicator is often more relevant to long-term investment horizons.
Capesize and Panamax classes are the most optimistic
On August 23, the number of dry bulk ships on order as a share of existing ships for Capesize vessels rose from 10.13% to 10.14%, reversing the prior week’s decline of 0.01%. Panamax and Supramax class vessels, on the other hand, fell from 16.15% to 15.98% and 4.87% to 4.64%, respectively. From a long-term perspective, however, order trend remains positive.
The overall backlog of new ship construction has begun to turn around since the beginning of the year, with Capesize vessels showing the most stabilization. While it looked like Supramax orders would start turning around at the start of 2013, the indicator has continued to slump since April. Orders for Panamax vessels remain higher than other ship classes, but they’ve also risen since the end of May with Capesize vessels.
The weak orders in Supramax vessels possibly reflect managers’ expectations for limited tightening of excess supply ahead. Yet they could also signal an opportunity if demand picks up, since supply won’t grow as much. While Panamax vessels continue to hold the number-one lead in orders—which could lead to more than necessary supply growth—the increase we’ve seen since May (along with orders in Capesize vessels) is quite positive. The demand is likely fueled by expectations of higher iron ore and grain shipments, as were also mentioned in Golden Ocean’s earnings transcript.
Implication for shipping companies
There’s much debate over whether demand will outpace supply growth this year, with analysts and company CEOs throwing out numbers all over the place. But the turnaround in orders, or the steadier decline in orders, point towards lower supply growth ahead, and suggests that the industry return should normalize over the next few months and years. This is long-term positive for dry bulk shippers like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc. (SB).
Disclosure: I own shares in Diana Shipping Inc. (DSX).
© 2013 Market Realist, Inc.
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