In a highly commoditized industry, like the shipping industry, capacity is an important metric that directly impacts companies’ top line, or revenue performance. When capacity grows faster than demand, competition will rise among individual shipping firms as they try to utilize idle ships and cover fixed costs. This will lower day rates, which will negatively affect bottom line earnings, free cash flows and share prices for companies, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM) and Safe Bulkers Inc. (SB).
Year-over-year capacity growth stays around 7.0%
Dry bulk ship capacity grew 7.05% year-over-year to 599 million dwt for the week ending May 17th, lower than the prior week’s change of 7.11%.[1. DWT: a weight measurement that indicates the amount a ship can safely carry and transport across oceans.] Year-over-year capacity growth has hovered around 7.0% lately, after falling from 8.0% at the start of year. This points to a slightly negative outlook as new builds continue to be delivered, depressing shipping rates, earnings and free cash flows for dry bulk shipping firms. On a positive note, capacity grew by just 0.06% on a week to week basis (for the same week), lower than the prior week’s 0.12%. Since 2013, the average weekly growth rate stood around 0.12% as of May 10th. As it is necessary for week-over-week capacity growth to stay below 0.12% on average for capacity to grow less than 6.6% in 2013, last week’s data was encouraging. While recent data shows capacity growth has yet to fall further, the dry bulk industry has shown substantial progress since the beginning of 2011 when capacity was growing at 16% year-over-year, primarily driven by over purchases of new ship builds as managers became too optimistic with future trade growth before the financial crisis.
Outlook for later half of 2013
Although China’s iron ore import volume, which makes up ~20% of global dry bulk trade volume, will unlikely grow as fast as it once did (see Dry bulk shipping demand growth will unlikely hit pre-2008 levels for further details), current data suggests supply will likely grow less than Jefferies’ estimated minimum demand growth of 6.0% in 2013. Dry bulk firms, such as DRYS, DSX, NMM and SB, will continue to face headwinds in the short to medium-term since capacity growth remains elevated. Also, April’s manufacturing numbers pointed to a weak industrial sector and several valuable contracts will likely expire (see Why Diana will outperform Safe Bulker and Navios Maritime). But managers are becoming more optimistic with long term growth and are placing new ship orders. Policymakers will also likely support demand over the medium to long-term (see Policymakers to support shipping demand growth this year). For investors looking to diversify investments across several companies, they can look towards the Guggenheim Shipping ETF (SEA), which invests in the largest shipping companies worldwide.