Federal shutdown and sentiment hit dry bulk stocks (Part 2 of 6)
Managers remain optimistic
From September 27 to October 4, ship orders for Capesize vessels fell slightly from 10.34% to 10.32%, after rising from 10.28% on September 20. Supramax vessels also registered a decline from 4.66% to 4.59% over the same period, while orders for Panamax vessels surged ahead from 16.04% to 16.64%. Analysts use a percent of existing vessels because it accounts 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.
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—a reflection of optimism among managers regarding the future profitability of these ships.
Since dry bulk ships usually take one to two years to construct, the indicator is often more relevant to long-term investment horizons. But turnarounds are sometimes enough to put a bottom or top for the shares of dry bulk shipping companies, since the market is forward-looking,
Panamax orders showing support
The recent increase in Panamax orders is a positive sign, despite an elevated order level compared to Supramax or Capesize vessels. Record shipments from Australia and Brazil have driven Capesize rates higher, which has also supported Panamax rates as customers moved towards using two Panamax ships that are smaller in class.
Iron ore shipment growth is expected to continue in 2014, despite possible weakness in the short term due to seasonality. 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
As long as orders continue to stay at current levels or run higher, consider this as a 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 - Dry bulk shipping stocks hit by sentiment and government shutdown
- Part 3 - Construction activity drops, lower dry bulk supply growth ahead
- Part 4 - We’re at the start of higher fleet utilization, so rates will rise