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Must-know: Weekly dry bulk shipping industry fundamentals update (Part 3)

Xun Yao Chen, Industrials Analyst

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 specific 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.

(Read more: Capacity growth falls to 3.5-year low, why dry bulk shipping recovery continues)

Construction activity remains negative, but could also be positive

For the same week we looked at in Part 2, the week ending July 19, the number of ships under construction as a percentage of existing vessels fell from 4.45% to 4.41%. 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 fewer orders were placed post-2009, when managers 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 is positive over the medium to long term because it leaves room for demand to outpace supply growth between now and the time managers receive those new ships. This will be positive for shipping rates and company earnings. As long as shipping rates continue to turn around, you may see weakness in construction as a positive.

(Read more: China’s interbank lending rate falls below 6.0%, positive for dry bulk shipping?)

Capesize vessels attracting large orders

Finally, unlike what we inferred from Part 2, construction activity actually fell last week. This means that the divergence we saw in the number of dry bulk vessels on order (as a percentage of existing ships) and the orderbook (percent of capacity) is driven by an increasing number of orders for large ships, Capesize vessels, which haul primarily iron ore and coal from countries like Australia and Brazil. Perhaps managers are also expecting exports out of Australia and Brazil to grow by a significant amount over the next few years (see Rio Tinto to increase iron ore capacity, positive impact to dry bulk shippers).

Learn more about the key performance indicators of the dry bulk shipping industry

(Read more: Capacity remains elevated while demand risk emerges for shipping companies)

Continue to Part 4: Ship scrappage, or go back to Part 1 to see the list of key shipping indicators.

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