Annual capacity growth remains positively in a downtrend
From September 13 to 20, year-over-year growth in dry bulk capacity, measured in deadweight tonnage (DWT, the weight a ship can safely carry across the ocean) and published weekly by IHS Global Limited, for Capesize vessels dropped from 5.26% to 4.00%. This is the lowest level in several years. Year-over-year growth for Supramax vessels fell as well, dropping from 9.14% to 9.00%, showing improvements. Panamax vessels, however, rose from 9.87% to 9.99%. Analysts used year-over-year growth to adjust for seasonality and to make comparisons on a more long-term trend rather than a short-to-medium-term perspective.
Why is capacity important?
Analysts evaluate capacity growth to see whether it will exceed demand growth, instead of solely relying on indicators such as ship orders and ship prices that reflect managers’ perspective of future supply and demand dynamics. When capacity grows faster than demand, competition rises among individual shipping firms as they try to use idle ships and cover fixed costs. This lowers day rates, which negatively affects bottom-line earnings, free cash flows, and share prices for companies. On the other hand, when capacity increases can’t meet demand growth, shipping rates will rise, which bodes positively for dry bulk companies’ top line revenue, bottom-line earnings, free cash flows, and share prices.
Background on capacity growth
Driven by large placements of new ship orders, shipping capacity had ballooned over the past two years, as companies expected global trade growth to continue at a record pace. As they realized what they got themselves into, they’ve refrained from ordering more ships. The overall declines in capacity growth since 2011 show this development. Supply growth remained elevated, however, as trade growth fell with slowing economic growth in China. Nonetheless, with construction levels falling, it’s just a matter of time before capacity growth falls even further—especially for Panamax and Supramax ships—which would be positive for rates.
Weekly growth rate continues to fall
During the second half of last year, several dry bulk shipping companies had pushed back deliveries—for Capesize vessels in particular—as China’s economic growth fell and rates fell to a record low. This year, delays may not be that significant, as rates have risen above the lows. Nonetheless, insufficient delays would mean managers are more optimistic and should be taken as a long-term positive.
On September 20, the eight-week moving average weekly growth rate stood at 0.08% for Capesize vessels, which was lower than the 0.10% on September 13. While there was a possibility that new deliveries would remain elevated, it seems the likelihood of that has fallen over the past few weeks. Weekly growth for Panamax vessels remains elevated at 0.17%. But on an encouraging note, weekly growth dropped from 0.18% to 0.13% without using an eight-week moving average. Weekly growth for Supramax vessels follows a similar pattern to Capesize vessel growth.
Demand to outpace fleet growth next year
As construction activity continues to fall, it’s just a matter of time until we see lower growth. So while investors fudge over whether it’s this year or next year that fundamentals will improve, the market would likely continue to support the share prices of companies like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc. (SB) with little downside in the near term. The CEO of Golden Ocean Group, along with other analysts, are expecting supply growth of just ~3.5% in 2014 and 2015, while historic dry bulk trade has grown at ~5.5%.
© 2013 Market Realist, Inc.
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