On November 1, the year-over-year growth in Capesize vessel capacity, measured in deadweight tonnage (the weight a ship can safely carry across the ocean) jumped from 6.12% the week before to 6.58%. The same happened to Panamax and Supramax vessels, which rose from 10.32% to 10.47% and 8.19% to 8.30%, respectively. Analysts use year-over-year growth to adjust for seasonality and to make comparisons on a more long-term trend rather than a short-to-medium-term perspective.
Supply is often mentioned by company CEOs because its growth and demand determine where shipping rates are heading in a few months and over the quarters ahead. When capacity grows faster than demand, competition rises. This lowers day rates, which negatively affects bottom-line earnings, free cash flows, and share prices for companies. On the other hand, when capacity trails demand growth, shipping rates will rise, which bodes positively for dry bulk companies’ top line revenue, bottom-line earnings, free cash flows, and share prices.
The recent run-up may scare investors. But it was largely driven by limited capacity increases during October and November last year, as the shipping industry had to face depressed shipping rates and resorted to scrappage and slippage to maintain rates at profitability. So investors shouldn’t read too much into this until the end of November—like we’ve said in the past two related series.
Lower supply growth
As supply growth could fall below 4.0% in 2014 (see the previous article in this series) and industry experts expect an average of 3.5% annual growth for 2014 and 2015, lower supply growth should support shipping rates.
During the first eight months of this year, the dry bulk trade itself has grown at 5.8% compared to the same period, according to RS Platou. This means supply and demand balance are expected to tighten and shipping rates will likely run higher if China’s economy doesn’t do poorly in 2014 and 2015. This would be positive for dry bulk shippers like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Holdings Inc. (NM), Safe Bulkers Inc. (SB), and the Navios Maritime Partners LP (NMM).