Retracement in an uptrend
On November 1, ship orders for all key dry bulk vessel classes fell. Orders as a percentage of the existing number of ships for Panamax (used to haul iron ore, coal, and grain) fell from 18.01% to 17.82%, while Capesize’s (the largest common ship class to move iron ore and coal) fell from 10.38% to 10.35%. Orders for Supramax, which is the smallest of the three classes, also fell—dropping from 4.37% to 4.36%. Analysts use a percent of existing vessels because it accounts for changes in the number of ships over time.
Why are ship orders important?
Ship orders reflect 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. But when they expect demand to outpace supply growth and rates to be attractive for new vessels, companies return to the shipyard to place new orders. So rising or high levels of ship orders often indicate that shipping rates will rise.
Shipping cycle uptrend
Despite lower shipping rates, managers have continued to place orders for new Capesize and Panamax vessels over the past few weeks. This is the first time that orders have retraced in a while, which is normal in an industry upcycle—when rates are rising and profits are growing. This is because managers aren’t likely to over-purchase and are cautious.
How orders affect share price
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 it’s short-term or forward-looking. This behavior can significantly influence share price movements.
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).
Earnings should increase
As long as orders remain high or continue to increase, investors can expect overall earnings for shipping companies to rise over the long term. It will be a good idea to listen to what managers have to say about the future of the shipping industry in their upcoming earnings reports.
© 2013 Market Realist, Inc.