Why is capacity important?
Capacity is an important factor that directly impacts companies’ top line (revenue) in a highly commoditized industry, like shipping. When capacity grows faster than what’s demanded, competition rises among individual shipping firms as they try to use idle ships and cover fixed costs. This lowers day rates, which negatively affects 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), Eagle Bulk Shipping Inc. (EGLE) and Safe Bulkers Inc. (SB).
Breaking below 7.0%
Dry bulk capacity, measured in DWT and published weekly by IHS Global Limited, grew 6.63% year-over-year for the week ending June 28th, while year-over-year growth using last four weeks of data fell to 6.85%. This is the lowest increase the dry bulk shipping industry has experienced since the end of 2009. Shipping capacity had a huge run over the past two years, driven by large placements of new ship orders as companies expected global trade growth to continue at a record, led by China’s massive investment led economic growth.[1. DWT: a weight measurement that indicates the amount a ship can safely carry and transport across oceans.] The fact that capacity growth fell below 7.0% is a relief to the dry bulk shipping industry as growth has flirted around 7.0% for a while, which is higher than China’s dry bulk demand growth of 4.5% reported during the first quarter of 2013 by RS-Platou, an international ship and offshore investment bank.
What this means
Lower capacity growth may give investors some excitement and bid the stock prices of dry bulk companies such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), Eagle Bulk Shipping Inc. (EGLE) and Navios Maritime Partners LP (NMM) up. Such development, in addition to higher ship orders, have supported these companies during the first half of this year. But current excess capacity growth is still a negative for dry bulk shipping companies’ revenues, because it will continue to put pressure on shipping rates (see our Shipping Indexes Page for articles on current rates), which negatively affects earnings and medium-term share prices, especially if several of their maturing contracts were drafted out above current market rates: see Maturing contracts present significant downside for certain shipping firms.
Risk of lower-demand growth is also rising as the interbank repo rate for Chinese banks skyrocketed to a record recently: see Must-know: Shipping companies hit by China’s financial woes, which usually paints a negative outlook for China’s economy in the future. If investors (the market) start to focus more on short term fundamentals and become more risk averse, share prices of dry bulk shipping companies will likely fall in the short-term. Nonetheless, a crash like 2008 is unlikely: see Low inflation supports availability of monetary stimulus, positive for shipping stock.
To see other key drivers that affect the marine shipping industry, visit our driver page: Marine Shipping. For other industries currently availability: Home Page.