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Ship orders takeaway
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.
Orders remain in an uptrend
On October 18, ship orders of Panamax vessels continued to rise from the week before. Orders as a percent of existing number of ships increased from 16.99% to 17.59%. Ship orders for Capesize vessels fell from 10.66% to 10.57% over the same period, but remain in an uptrend since the middle of this year. Analysts use a percent of existing vessels because it accounts for changes in the number of ships over time.
Long-term trend turning around
Backlogs for new ship constructions have started to turn around since the start of the year, with Capesize and Panamax vessels performing well—a reflection of optimism among managers regarding the future profitability of these ships.
Since dry bulk ships usually take one to two years to construct, the indicator is often more relevant to long-term investment horizons. But the market is often forward-looking by roughly a year, depending on whether they’re risk-loving or risk-adverse. So an increase in orders can have an immediate positive impact on the share prices of companies and ETFs like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Holdings Inc. (NM), Safe Bulkers Inc. (SB), and the Guggenheim Shipping ETF (SEA).
Panamax vessels showing support
Despite an elevated order level compared to Supramax or Capesize vessels, the recent rise in Panamax orders is positive. Record iron ore shipments from Australia and Brazil have driven Capesize rates higher, which has also supported Panamax rates as customers moved towards using two Panamax ships that are smaller in class. As long as orders remain high or continue to increase, investors can expect overall earnings for shipping companies to rise over the long term.
© 2013 Market Realist, Inc.