What is the weekly series for?
At MarketRealist.com, we break down key indicators that drive or highly correlate with the performance of an industry or major publicly traded companies. Understanding how these indicators affect fundamentals or what they might suggest should help investors get a clearer picture of the industry environment and make sound decisions.
Shipping rates: A key driver of shipping stocks
Shipping rates are perhaps the most important indicator that affects the long-term performance of stocks. When shipping rates for transporting dry bulks like iron ore, grain, and coal are on the rise over the medium to long term, dry bulk shipping companies and ETFs like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), Safe Bulkers Inc. (SB), and the Guggenheim Shipping ETF (SEA) tend to benefit.
Supply and demand drive rates
Shipping rates are largely driven by supply and demand of vessels. Tighter supply, whether driven by higher demand or lower supply, will result in higher rates. Conversely, a looser supply and demand balance will lead to lower rates. Because shipping companies generally can’t pull ships out of service, shipping rates can change drastically—even with a small percent change in fleet utilization (the number of ships being employed), which can make investing in the industry volatile.
Factors affecting demand
Demand for ships depends on trade volume and trade distance. As the global trade highly correlates with global economic growth and overall demand of commodities, China’s economic growth plays a particularly important role in the shipping industry. Most iron ore and coking coal that are shipped to China are used to make steel, which is a key input for making buildings and infrastructure.
Often, movements in commodity prices and customer’s profitability can show investors whether economic activity and demand for dry bulk ships are rising or falling. Plus, shifts in policies and mining economics can affect global trade positively or negatively.
Factors affecting supply
Ship orders and scrapping activity are the two most influential activities that affect supply. But expected shipping rates do influence managers’ decisions about whether to purchase or build new ships. New ship deliveries can also increase companies’ earnings.
Shipping rates and orders affect ship price (values)
Finally, the prices (values) of ships are another key indicator that drives stock prices, because one way to measure the value of a company is by its assets. Ship prices are often affected by shipping rates and ship orders. But we can look at rising or falling ship prices as leading indicators that show where future shipping rates will be.
Although these key indicators are often published on different dates of the month and days of the week, we generally compile them into a series so that investors can get a fuller picture of how everything is performing as a whole. We don’t recommend investors rely on any one indicator alone. This week, we’ll continue to monitor what managers are seeing and supply growth, focusing on China.