Long-term trend remains positive for dry bulk shipping firms (Part 2 of 11)
Managers remain optimistic
From September 20 to 27, ship orders for Capesize vessels improved further from 10.28% to 10.34%, while orders for Panamax vessels rose from 15.87% to 16.04%. Supramax vessels (the smallest class of the three), on the other hand, fell from 4.66% to 4.64%. Analysts use a percent of existing vessels because it adjusts for changes in the number of ships over time.
Ship orders takeaway
The number of ships on order reflects managers’ expectations of future supply and demand differences. When they expect future supply to increase more than demand, managers will refrain from purchasing new ships. However, when they expect demand to outpace supply growth, companies return to the shipyard to place new orders, on the condition that they expect to generate profits with the new vessels. So rising or high levels of ship orders often indicate that shipping rates will rise.
Since dry bulk ships usually take one to two years to construct, the indicator is often more relevant to long-term investment horizons. But because the market is forward-looking, turnarounds are sometimes enough to put a bottom or top for the shares of dry bulk shipping companies.
Long-term trend turning around
Backlogs of new ship constructions have been turning around since the start of the year, with Capesize and Panamax vessels performing well. While it looked like Supramax orders would start turning around at the start of 2013, the indicator has continued to slump since April. This is a possible negative if the decline wasn’t due to increased construction activity—highlighting the need to look at several indicators to get a picture of what’s happening in the industry.
Panamax orders showing support
Panamax orders are finding support, as record shipments from Australia and Brazil have driven Capesize rates higher than they were in 2011 and customers are moving towards using two Panamax ships (which are smaller than Capesize vessels) to haul iron ore. So rates for Panamax have also been climbing lately.
Higher iron ore shipments are expected to continue into next year, despite possible weakness in the short term since rates have historically peaked between October and December. Towards the end of the year, we could also see some upside for Panamax vessels due to lower supply growth and higher grain shipments, as the USDA (United States Department of Agriculture) currently projects a record crop output.
Implication for shipping companies
Although ship orders aren’t rising rapidly, the stabilizing or rising trend shows that managers remain optimistic about the future prospects of the shipping industry. Rates should continue to improve and normalize over the next few months. Besides, stable orders could also mean competition to purchase new ships is less intense and companies as a whole are letting rates rise higher, which contrasts to what we’re seeing among product tankers. This is long-term positive for dry bulk shippers like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc. (SB).
Browse this series on Market Realist:
- Part 1 - Idea: Do dry bulk stocks actually follow the Baltic Dry Index?
- Part 3 - Shippers scrapped more vessels, but medium-term positive remains
- Part 4 - Stable construction: Why managers expect medium-term higher rates