Reassessing the return-to-risk ratio
After a long period of numerous new ship deliveries that led to industry overcapacity, with companies’ margins and share prices crashing since 2008, dry bulk shipping companies soared earlier this year on the expectation that recovery will take place soon. Companies’ margins crashed since 2008, and so did share prices. Now that the stocks have recovered somewhat in share prices, investors wonder whether recovery really hit the dry bulk shipping industry towards the end of the year. Are share prices still attractive at their current prices, or are they too expensive for the amount of risk investors are taking?
Last week, a few key indicators that reflect supply and demand dynamics in the shipping industry showed some bullish signs (rising prices).
- Ship orders (Part 2)
- Ship construction (Part 3)
- Ship capacity (Part 4)
- Shipping rates (Part 5)
- Forward contracts (Part 6)
- Ship prices, or vessel values 1
Importance of supply and demand
The supply and demand of ships are the most important factors that affect shipping rates, which in turn affect earnings and share prices in a highly commoditized industry such as shipping. Unlike Windows and Apple, which have features that set them apart from each other beyond price (think design, versatility, and compatibility), the shipping industry offers little differentiation between companies, so shipping firms rely most on rates. That’s why supply and demand are so important in the industry, because they affect shipping rates. When supply growth outpaces demand, competition among shipping firms rises, which leads to lower shipping rates. On the other hand, if supply growth can’t meet demand growth, customers will have to pay higher rates to transport goods across the ocean. The latter case is negative for customers but positive for dry bulk shipping firms, because it increases profitability. Higher profitability will often drive share prices higher.
We update these indicators regularly on Market Realist’s website as new data becomes available. Explore the links above to learn more about the seven key shipping industry indicators and why you should watch them.
Continue to Part 2
- This article is from a previous series, but it’s also relevant to this analysis, so we recommend you read it as well if you haven’t already. ↩
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