Continued from Part 2
Ship construction activity
Part 2 of this series explains how ship orders can illustrate 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.
Construction activity remains negative, but could also be positive
For the same day we looked at in Part 2, August 2, the number of ships under construction as a percentage of existing vessels continued its fall from the prior week’s 4.34% to 4.26%. Construction activity started rising in 2009, as ship building firms began work on a large number of orders, which coincided with a peak in the number of ships ordered at ~50%. Activity has fallen since 2011, as managers placed fewer orders post-2009, when they saw how much they had over-ordered.
The weakness in construction activity shows that managers are in no rush to receive these new orders and expect shipping rates, as well as profitability, to remain low for at least the short term. This may point to a slight negative outlook for dry bulk shipping companies such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Knightsbridge Tankers Ltd. (VLCCF), Eagle Bulk Shipping Inc. (EGLE), and Safe Bulkers Inc. (SB).
However, lower construction activity will lead to lower capacity increase. This could be positive because it leaves room for demand to outpace supply growth, which would benefit shipping rates, profitability, and earnings between now and the time managers receive those new ships. Companies like Knightsbridge Tankers Ltd. (VLCCF) and Diana Shipping Inc. (DSX) have made purchases of new vessels that will mostly be delivered in 2015 and beyond. As long as shipping rates continue to turn around, you may see weakness in construction as a positive.
Learn more about the key performance indicators of the dry bulk shipping industry
More From Market Realist