On the supply side, how optimistic are dry bulk shippers?
Improved supply fundamentals
As commoditized as the dry bulk shipping industry is, shipping rates are all about the interaction between supply and demand. Over the past three years, the supply side has been the concern, because overcapacity was blamed for the dropping shipping rates.
However, as illustrated in Safe Bulker’s third quarter financial reports in 2013, the order book has gradually been reduced by the end of 2013 due to declining demand. According to Hellenic Shipping News Worldwide, in 2013, approximately 60 million deadweight tonnage (or dwt) was delivered and approximately 22 million dwt was removed. As a result, net fleet growth ended at 7%, which was considerably lower than that in the past three years. Tightened supply will benefit dry bulk shippers by raising shipping rates.
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Recent active acquisitions by dry bulk shippers
Entering 2014, dry bulk shippers seem to be picking up their optimism again, which is clear in their recent activity purchasing new ships, despite the continuous fall of the Baltic Dry Index.
For example, Scorpio Bulkers has time-chartered in five dry bulk carriers, and Star Bulk Carriers Corp. announced in its press release that it has entered into binding agreements to acquire two modern Post-Panamax bulk carriers, which are expected to be delivered to Star Bulk by the mid February 2014 and early March 2014, respectively.
Attention to orderbook
We can take surging orders for new capacity as a positive sign that people are expecting higher shipping rates and buying more. Investors should pay attention to their targeted dry bulk shipping companies’ order books to see whether they’re buying new vessels. In this way, investors can not only get a more comprehensive sense of the companies’ expectations for future demand, but also predict these purchasing activities’ potential impact on companies’ fleet profiles, cash positions, and level of indebtedness.
Higher newbuild and second-hand prices
Dry bulk shippers have such an optimistic anticipation about the future that they’re accepting higher newbuild and second-hand prices. Second-hand ship prices reflect projections in the short to medium term, and newbuild prices are more useful for long-run analysis. At present, both newbuilding and second-hand prices are experiencing a robust rally.
In RS Platou’s monthly shipping market report, newbuild prices have been steadily climbing throughout 2013. The newbuild price of Capesize in January 2014 is around $53 million, compared to $45 million in December 2012. The newbuild price of Kamsarmax is between $29 million and $30 million, compared to $26 million in December 2012. Some new ships are more expensive than these figures. For example, Scorpio Bulkers has announced its plan to purchase five Kamsarmax vessels in December 2013 for a total of $157 million, so the average purchasing price of Scorpio Bulker’s new vessels is $31.4 million per vessel, exceeding the price reported by RS Platou.
In the market information provided by Simpson Spence & Young, the Capesize five-year-old price was $44 million in December 2013, compared to $30 million in December 2012. The Panamax five-year price was $24.5 million in December 2013, compared to $18.5 million in December 2012. The Handysize five-year price was $20 million in December 2013, compared to $15 million in December 2012.