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Continued from Part 1: Dry bulk shipping stocks have risen a lot, now what?
Why is capacity important?
Analysts look at 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—or vice versa.
Annual capacity growth remains in downtrend
From August 30 to September 6, 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 fell from 5.31% to 5.15%. Panamax vessels also saw a decline, dropping from 9.98% to 9.93%. Supramax, on the other hand, rose from 9.08% to 9.28%.
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. The recent decline in year-over-year capacity growth shows development. With construction levels falling, it’s just a matter of time before capacity growth falls even further—especially for Panamax and Supramax ships.
Weekly growth rate continues to fall
Last year, several dry bulk shipping companies had pushed back deliveries—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. On September 6, the eight-week moving average weekly growth rate stood at 0.11% for Capesize vessels, which was lower than 0.14% on August 30. Panamax vessels also saw a decline in weekly growth from 0.17% to 0.16%. Supramax’s eight-week moving average stood unchanged at 0.09%.
Since the start of this year, Capesize vessel capacity grew 4.58%, Panamax by 7.64%, and Supramax by 5.75%. If an average of 0.15% weekly growth holds throughout the end of the year, we can expect an additional capacity of ~2.25%. There is and has been much debate over whether capacity growth will outpace additional demand this year.
Near-term capacity growth not worrisome
Last year, dry bulk trade grew 7%. As I’m writing this, rates for Capesize vessels are now above 2012 highs, driven by an increase in iron ore mining capacity in Australia and Brazil that’s expected to add 10% to iron ore trade this year. August’s rate increase (a historically weak month) is a sign to be optimistic.
There’s also a wide consensus that shipping rates will recover in 2014 with supply growth only at ~3.5%. So while investors fudge over whether it’s this year or next year that fundamentals will improve, the market would likely continue to support 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.
© 2013 Market Realist, Inc.