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Investing in the Dry Bulk Industry: Fleet Supply Analysis

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Dry bulk fleet

DryShips (DRYS) commented that its total dry bulk fleet’s compound annual growth rate for 2005 to 2014 stood at 9.1%. Its fleet increased by 4.4% year-over-year in 2014. The dry bulk fleet is expected to increase further by 5.1% and 4.6% in 2015 and 2016, respectively.

Investors can track the orderbook for the longer run, as dry bulk ships generally take one or two years to construct. Managers’ expectation of future supply and demand differences clearly reflects in the number of ships they order. When managers refrain from purchasing new ships, their holding back suggests that future supply should increase more than demand. When they expect demand to outpace supply growth, companies return to the shipyard to place new orders, expecting to generate profits from these new vessels. So rising ship orders often indicate that shipping rates will rise.

In 2014, orders were placed for an additional 60.6 million deadweight tonnage (or DWT) of dry bulk capacity—much lower than the approximately 104 million DWT in 2013. However, this amount is still on the high side, with the majority of 27.9 million in deadweight orders in the Capesize sector.

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Scrapping and slippage

DryShips notes that there still is considerable scrapping potential, as approximately 9% of its fleet is 20 years or older and an additional 9% is between 15 and 19 years old. This higher age, coupled with the depressed freight environment, should boost demolition activity going forward. This trend is already emerging in the increased scrapping of January 2015.

Lastly, it’s worth noting that slippage in 2014 ended up at approximately 36%—a trend that’s expected to continue in 2015. This is mainly due to the negative freight outlook in combination with the lack of financing for newbuild projects, which are being postponed or canceled, providing some respite to the substantial dry bulk orderbook.

These factors may also impact companies like Safe Bulkers (SB), Navios Maritime Holdings (NM), Diana Shipping (DSX), and Navios Maritime Partners (NMM). The SPDR S&P 500 ETF Trust (SPY) tracks S&P 500 companies.

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