Continued from Part 1
Ship construction activity
Part 2 of this series explains how ship orders can illustrate managers’ expectations for future supply and demand differentials. But new ship orders don’t always translate into new constructions right away. Sometimes, shipping firms specify a specific date of delivery for the new orders. If the delivery date is farther out, ship construction firms will delay work. So construction activity gives investors further insight into future supply and demand differences.
Construction activity remains negative
For the same week we looked at in Part 2, the week ending July 5, the number of ships under construction as a percentage of existing vessels increased from 4.43% to 4.45%. Although the week-over-week increase was positive, the long-term trend remains down. Construction activity began rising in 2009, as shipping firms began work on a large number of orders. As a result, the number of ships on order peaked at ~50% in 2009, and it has continued to fall.
The weakness in construction activity shows that managers are in no rush to receive these new orders and expect shipping rates, and that profitability will remain low for at least the short term. This spells a negative outlook for dry bulk shipping companies such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Knightsbridge Tankers Ltd. (VLCCF), Eagle Bulk Shipping Inc. (EGLE), and Safe Bulkers Inc. (SB).
Medium- to long-term positive
However, lower construction activity will lead to lower capacity increase. This is positive over the medium to long term because it leaves room for demand to outpace supply growth between now and the time managers receive those new ships. This will be positive for shipping rates and company earnings. But given that construction activity has ranged between ~3.3% and ~8.7% of total capacity, it might not be too long before construction activity rises again.
Learn more about the seven key shipping indicators
Continue back to Part 1 to see the list of other key shipping indicators.