Federal shutdown and sentiment hit dry bulk stocks (Part 3 of 6)
The importance of ships under construction
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.
Ship construction activity stabilizing as a whole
From September 27 to October 4, the number of ships under construction as a share of existing ships for Capesize vessels fell from 3.17% to 2.86%, based on the last four weeks of average data to smooth the trend a little. If only last week’s data were accounted for, the number of ships under construction would have fallen from 3.06% to 2.00%—a significant decline.
Construction activity for Panamax vessels remains in a downtrend, falling from 6.02% to 6.01% on the last four weeks of data. Supramax also fell, from 3.24% to 3.13%.
The current status of vessels under construction
- Construction orders for Panamax vessels remain elevated compared to Supramax and Capesize vessels. So the mid-size vessel should see the largest supply increase over the short to medium term. But a falling construction level means lower supply growth ahead.
- Supramax vessels saw a jump in activity in April, which explains why orders fell around the same time. So even though the number of ships on order alone would have shown that all is not well for Supramax vessels, April’s jump may point to optimism among companies focused more on minor bulks, or intense competition due to smaller capital requirements.
- Construction activity for Capesize remains most positive. The recent decline shows that new ship deliveries will continue to fall over the short to medium term. Plus, it’s important to note that construction of Capesize vessels takes longer because of their size.
Construction activity is basing
The current trend shows that construction isn’t ready to base yet, but the flatter downtrend shows that the construction-starts-to-delivery ratio is near balance point (the number of orders that are going into the construction process compared to those that are delivered to shipping companies match up). This reflects management’s expectation of higher rates in the medium term.
As shipping companies just went through a huge bubble burst, it’s unlikely for new ship deliveries to outpace demand. Psychologically, managers aren’t going to rapid-fire new vessel orders like they did from 2006 to 2008. With good shipyards fully booked, according to shipping company CEOs, investors should view the current trend as a medium-to-long-term positive 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). Lower construction activity will drive supply growth lower and support shipping rates.
Browse this series on Market Realist:
- Part 1 - Dry bulk shipping stocks hit by sentiment and government shutdown
- Part 2 - With robust Panamax orders, dry bulk fundamentals are improving
- Part 4 - We’re at the start of higher fleet utilization, so rates will rise