Why fleet demand and orderbook with china support industry growth

Market Realist

Overview: Navios Maritime Partners’ earnings (Part 10 of 12)

(Continued from Part 9)

Fleet demand

For 2014, net fleet additions are expected to be lower than last year. Net fleet growth is expected to be lower than demand growth. This will result in an improved rate environment. RS Platou’s data revealed that the bulk carrier orderbook and the fleet capacity have been increasing. This supports industry growth.

The scrapping rates of older, less fuel efficient vessels have continued this year. Almost eight million deadweight tons (or dwt) were scrapped through July 25, 2014. With 10% of the fleet being 20 years old, it provides ~73 million dwt of scrapping potential combined with the current rate environment. This encourages scrapping of older vessels. Demolition prices appear to depend on overall steel prices. It doesn’t depend on vessel supply. As a result, they’re expected to remain high.

Chinese development supporting industry

In June, 2014 Chinese fixed asset investments continued to grow 17% year-over-year (or YoY) mainly led by railway, infrastructure, housing, and constructions. China’s purchasing manager’s index (or PMI) data reflected similar trends. Crude steel production and Chinese iron ore imports also reflect trends supporting the shipping industry.

Domestic iron ore production in China indicates an effective iron content in the range of 15%—compared to the 63% of imported ore. Despite an 8% increase domestic iron ore production in June, the quality seems to be deteriorating. Based on this data, the substitution of low quality domestic iron ore with imported ore would be positive for the shipping industry.

These developments in the Chinese economy will likely support companies like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Acquisition (NNA), Navios Maritime Holdings Inc. (NM), and Navios Maritime Partners (or NMM). The Guggenheim Shipping ETF (SEA) tracks these shipping companies. It will also benefit from the Chinese demand.

In the next part of the series, we’ll take a look at the company valuations and industry outlook.

Continue to Part 11

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