Ship order strength is a must-follow for dry bulk shipping investors

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Ship orders

While the dry bulk shipping industry has been experiencing some weakness, ship orders have remained in an uptrend since the start of the year. New ship orders serve as an important indicator for dry bulk shipping companies and the Guggenheim Shipping ETF (SEA) because they reflect management and ship buyers’ sentiment of the industry’s outlook.

Bulk Carrier Orderbook

At the end of 2013, the total capacity of dry bulk vessels that were ordered or under construction stood at ~120 million dwt (deadweight tonnage). By the end of May, that had risen to just above 140 million dwt. As a percentage of capacity, which takes into account increases in fleet sizes over the years, orderbook has increased from 16.5% to near 19.5%, though May’s orders have been rather silent over the last few months.

Rates are optimistic, but how about orders?

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Almost every management team from dry bulk shipping companies such as DryShips Inc. (DRYS), Navios Maritime Holdings Inc. (NM), Safe Bulkers Inc. (SB), and Baltic Trading Ltd. (BALT) was rather optimistic for the second half of 2014. Yet news of new purchases have been fairly limited since the start of the second quarter. Given high vessel prices (a topic we’ll discuss later in this series) and a weak spot market, ship buyers have become cautious and are sitting on the sidelines.

If shipping rates improve year-over-year basis during the second half of this year, ship orders could pick up. The strength of ordering, however, would be more important for dry bulk shipping investors to watch. If managers aren’t buying in a rising market, it’s better to be cautious and not jump into rallies that could be short-lived—unless investors have reason to believe rates will go higher than what the market or ship buyers are expecting or supporting.

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