Construction activity signals dry bulk shipping recovery in 2014



Ship construction activity

Ship orders reflect 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 particular date of delivery for the new orders. If the delivery date is farther out, ship construction firms will delay work. So construction activity, on top of ship orders, gives investors further insight into managers’ expectation of future supply and demand differences as well as when and by how much supply will grow in the future.

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Construction activity travels farther south

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On August 30, the number of ships under construction as a share of existing vessels held steady from the previous week, based on four weeks of data to smooth out short-term noise. Capesize construction fell one basis point from 3.23% to 3.22%, Panamax construction was unchanged at 6.20%, and Supramax construction rose one basis point to 3.31%. The overall indicator rose from 4.31% to 4.33%.

Panamax vessels continue to show an elevated level of construction activity. This confirms that Panamax vessels will continue to see the largest increase in supply this year, which could negatively affect Panamax rates. On the other hand, we saw a jump in construction activity for Supramax vessels in April, which explains why Supramax orders fell around the same time. Construction activity for Capesize vessels also remains in a downtrend. So while we might have said all is bad for Supramax vessels based on the number of ships on order, the jump we saw in April may point to optimism among companies focused more on minor bulks.

Lower construction activity: Positive or negative?

The weakness in construction activity suggests managers aren’t in a hurry to receive new ships and expect shipping rates as well as profitability to remain low for at least the short term. Still, fewer ships under construction would lead to lower supply growth in the future—which is positive for capacity growth, and leaves a window for higher rates. So, depending on the context of other variables, construction activity could either be positive or negative for firms such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc. (SB). In this case, the trend likely reflects positive fundamental development.

Disclosure: I own shares in Diana Shipping Inc.


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