The importance of ship orders
The number of ships on order is one measure that reflects managers’ expectation of future supply and demand differences. When managers refrain from purchasing new ships, this shows future supply will increase more than demand. When they expect demand to outpace supply growth, companies return to the shipyard to place new orders on the condition that they expect to generate profits with the new vessels.
So rising ship orders often indicate that shipping rates will rise. Since dry bulk ships usually take one to two years to construct, the indicator is often more relevant to long-term investment horizons.
The bulk orderbook has increased to 146.2 million DWT from 144.5 million DWT in June 2014. But the orderbook has undergone wide expansion from its 2013 levels of 54.2 million DWT. In terms of number, the orderbook has increased significantly, to 1,730 from 1,685, with a major contribution from the Handymax/Supramax growth rate.
A rising orderbook suggests investors and managers are ordering more vessels than new ships are being delivered. This reflects managers’ optimism that investment returns are favorable because of rising rates, higher-than-expected rates, or current vessel prices remaining attractive.
Current scenario impact
With the orderbook recording growth since the past few months, this suggests that this growth should translate into higher margins and earnings for dry bulk shipping companies like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Knightsbridge Tankers Ltd. (VLCCF), Safe Bulkers Inc. (SB), and Navios Maritime Partners LP (NMM).
Because buying a new tanker is a large investment that can reach up to $100 million and above, with delivery dates that are usually two or three-plus years ahead, managers and investors tend to be more careful when placing orders.
As long as ship orders continue to rise, the long-term prospects of the Guggenheim Shipping ETF (SEA) and dry bulk stocks remain favorable.
© 2013 Market Realist, Inc.