Ship construction activity continues to show signs of turnaround

Market Realist

Why dry bulk shipping shares will rise after a recent fall (Part 3 of 6)

(Continued from Part 2)

Ship construction activity stabilizing as a whole

From September 6 to 13, the number of ships under construction as a share of existing ships for Capesize vessels rose from 3.23% to 3.25%. The same indicator for Panamax vessels fell from 6.15% to 6.12%, and that of Supramax held steady at 3.31%. For the industry as a whole, the indicator fell just slightly, from 4.33% to 4.32%. Analysts use a percentage of existing ships to factor in the changes in available ships, and they used a four-week moving average to smooth the data a little.

Dry Bulk Vessels Under Construction 2013-09-16

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.

Current status of vessels under construction

  • Panamax vessels continue to show elevated construction activity, based on a higher ratio compared to other vessels and from a historical standpoint, since it was just at 4% in 2010. This also suggests Panamax vessels should see one of the highest supply growth rates. Nonetheless, falling construction activity is a sign that supply growth should continue to fall in the months ahead. If supply does grow below additional increases in demand, we could see a positive effect on Panamax rates.
  • We also saw a jump in construction activity for Supramax vessels in April, which explains why Supramax 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 vessels remains most optimistic, as the number of existing orders is low and rates have been outperforming those of Panamax and Supramax lately. Plus, it’s important to note that construction of Capesize vessels takes longer because of their size.

Investors should view stabilization as positive

Stabilizing construction activity means managers are expecting rates to recover to adequate levels that can generate good returns for existing constructions soon. While higher construction activity could drive supply growth higher, it isn’t so worrisome, as shipping companies just went through a huge bubble burst. 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 higher construction activity as a 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).

Continue to Part 4

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