Why ship orders fell but remain fundamentally positive
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.
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Capesize and Panamax classes are the most optimistic
On August 30, the number of dry bulk ships on order as a share of existing ships fell for Capesize, Panamax, and Supramax vessels. Orders for Capesize vessels fell from 10.14% to 10.07%, Panamax vessels fell from 15.27%, and Supramax vessels fell from 4.66% to 4.38%. Panamax and Supramax vessels saw the largest declines in vessel orders, of 4.45% and 6.36%. Last week’s decline could suggest that ship builders have commenced construction activity on some ships.
Backlogs of new ship constructions have been turning around since the start 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. This is a possible negative if the decline wasn’t due to increased construction activity.
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 CEOs throwing out numbers all over the place. But the turnaround in orders, or the steadier decline in orders, points towards lower supply growth ahead and suggests that industry profitability 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).