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. Shipping and vessel construction firms often negotiate on particular dates of delivery for new orders. This depends on factors like shipping managers’ expectation of future profitability as well as ship builders’ capacity. So construction levels give us further insights.
Construction leveling out
Earlier this year, we thought ship construction was stabilizing. The number of existing vessels under construction did hover near 3.00% and 6.00% of existing capacity over the past three weeks for Capesize and Panamax vessels, respectively.
Yet on November 1, the number of Capesize vessels under construction fell to 2.93% from 2.99% a week ago, while that of Panamax fell from 5.98% to 5.94%. The total number of dry bulk ships under construction fell from 4.12% to 4.06%.
Construction can drop more
Construction activity is showing signs of flattening, which means the number of ships entering construction is equal to the number of ships being delivered. But last week’s change suggests construction activity could continue to drop. If we assume all the ships currently being built will be delivered within a year, then ship supply will only grow by 4% for 2014.
As we discussed in Part 1, the construction of dry bulk ships can take up to two years. So somewhere around 4% is very possible. It will be an interesting study to pit construction level and supply growth together. But that will be for next week.
A positive factor for dry bulk shippers
With good shipyards fully booked until 2016 and beyond, based on CEOs’ inputs, investors should view the current trend 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).
© 2013 Market Realist, Inc.