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Why Capesize vessels show the lowest annual supply growth

Xun Yao Chen, Industrials Analyst

Weekly dry bulk shipping critical indicator developments, August 12–16 (Part 8 of 9)

(Continued from Part 7)

Why is capacity important?

Although ship orders and construction activity are useful to get the insiders’ perspective, investors must also look at capacity growth to see whether it meets demand so that they don’t rely totally on managers, who can get caught up in day-to-day operations without seeing the bigger picture. When capacity grows faster than demand, competition rises among individual shipping firms as they try to use idle ships and cover fixed costs. This lowers day rates, which negatively affects bottom line earnings, free cash flows, and share prices for companies. But when demand grows at a faster rate, it’s positive for dry bulk shippers.

Annual capacity growth falls to a new low

From August 9 to 16, year-over-year growth in dry bulk capacity, measured in deadweight tonnage (DWT, the weight a ship can safely carry across the ocean) and published weekly by IHS Global Limited, fell for Panamax and Supramax vessels: from 10.34% to 10.19% and 9.83% to 9.62%, respectively. Capesize vessels, on the other hand, rose from 5.27% to 5.30%. Despite Supramax vessels showing lower levels of construction activity, capacity growth remained one of the highest this year—higher than Panamax. This is because the construction of Supramax vessels, which are smaller in size, is a lot quicker than the construction of larger vessels like Panamax and Capesize.

Driven by large placements of new ship orders, shipping capacity had a huge run over the past two years, as companies expected global trade growth to continue at a record. The recent decline in year-over-year capacity growth is a positive development because total dry bulk demand grew by just 5.1% during the first five months of 2013, as reported by RS-Platou, an international ship and offshore investment bank. Based solely on the level of capacity growth, Capesize vessels appear to be the winner. Further growth in iron ore shipments out of Brazil and Australia due to capacity expansions would benefit Capesize most, with iron ore trade expected to grow by 10% this year. On the other hand, large grain exports due to poor harvests in China but healthy production in the United States could push Panamax rates slightly higher.

Real test to come later this year

But the real test will come later this year. Last year, several dry bulk shipping companies pushed back deliveries—Capesize vessels in particular—as China’s economic growth fell and rates fell to record low. This year, delays may not be significant, as rates have risen above the lows. Currently, the eight-week moving average weekly growth rate remains above 0.1% for all three classes of vessels. For the week of August 9 to 16, Capesize ships grew by 0.16%, Panamax by 0.15%, and Supramax by 0.14%.

Since the start of this year, Capesize vessel capacity grew 4.57%, Panamax by 6.98%, and Supramax by 5.75%. If an average of 0.16% holds throughout the end of the year, we can expect an additional capacity growth of ~3.0% from here. So unless we see further declines in weekly growth rate, shipping rates could be negatively affected throughout the end of this year if demand doesn’t cover the extra supply from new ship deliveries. This would be medium-term negative for shipping companies such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc. (SB) in a long-term recovery.

Continue to Part 9

  • Part 1 - Why we continue to see a positive trend in dry bulk shipping
  • Part 2 - Iron ore imports reach record in July, good for shipping stocks
  • Part 3 - Why low iron ore inventory supports iron ore shipments