Why you shouldn't be afraid of dry bulk shipping industry pullback

Part 5
Why you shouldn't be afraid of dry bulk shipping industry pullback (Part 5 of 6)

Ship construction activity stabilizing, good for shipping stocks

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 shows possible sign of stabilization

From August 30 to September 6, the number of ships under construction as a share of existing vessels held steady for most ship classes based on four weeks of data to smooth out short-term noise. Capesize construction rose from 3.22% to 3.33% and Supramax activity stood unchanged at 3.31%. The overall indicator stood unchanged at 4.33%, possibly reflecting stabilizing construction activity.

Panamax vessels continue to show elevated construction activity, falling from 6.20% to 6.17% and confirming that supply growth remains a bit elevated for the particular vessel class. Nonetheless, lower construction activity should lead to lower supply growth in the months ahead. If supply does grow below additional increases in demand, we could see higher Panamax rates. We also saw a jump in construction activity for Supramax vessels in April, which explains why Supramax orders fell around the same time. So even though the number of ships on order alone would have shown that all is bad for Supramax vessels, April’s jump may point to optimism among companies focused more on minor bulks.

Investors should view stabilization as positive

Stabilizing construction activity means managers are expecting rates to recover to adequate levels that can generate good returns for existing constructions soon. Noticeably, several dry bulk companies have been rallying on the back of higher rates recently—Capesize rates in particular. While higher construction activity could drive supply growth higher, it isn’t so worrisome, as shipping companies just went through a huge bubble burst.

Psychologically, managers aren’t going to rapid-fire new vessels orders like they did from 2006 to 2008. With good shipyards fully booked, according to shipping company CEOs, investors should view higher construction activity as a positive 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).

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