Why a slower construction level fall is good for shipping rates
Ship construction activity stabilizing as a whole
From September 13 to 20, the number of ships under construction as a share of existing ships for Capesize vessels fell from 3.25 to 3.22%. The same indicator for Panamax vessels fell from 6.12% to 6.08%, and that for Supramax fell from 3.31% to 3.30%. For the industry as a whole, the indicator fell just slightly, from 4.32% to 4.31%. Analysts use a percentage of existing ships to factor in the changes in available ships. A four-week moving average smooths the data a little.
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The importance of ships under construction
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.
The current status of vessels under construction
- Construction orders for Panamax vessels remain elevated compared to Supramax and Capesize vessels. This also suggests Panamax vessels should see one of the largest number of new ship deliveries over the short to medium term.
- 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 not well for Supramax vessels, April’s jump may point to optimism among companies focused more on minor bulks, or intense competition due to smaller capital requirements.
- Construction activity for Capesize vessels remains most optimistic, as the number of existing orders is low and activity has stayed fairly constant, possibly reflecting managers’ more optimistic view for the near-term prospect of Capesize rates. But it’s important to note that the construction of Capesize vessels takes longer because of their size.
Construction activity is basing
Construction activity has started to base. This signals that the order-to-construction balance is finally normalizing (the number of orders that are going into the construction process compared to those that are delivered to shipping companies match up), which suggests higher rates ahead. 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 vessel 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 medium to long-term 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).