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Why you should watch 7 key industry indicators for shipping fundamentals (Part 5)

Xun Yao Chen, Industrials Analyst

Continued from Part 1

Why is capacity important?

Capacity is an important factor that directly impacts companies’ top line (revenue) in a highly commoditized industry, like shipping. 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.

Driving farther away from 7.0% growth

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, grew 6.04% year-over-year for the week ending July 12, while year-over-year growth using the last four weeks of data stood at 6.48%. This is the lowest increase the dry bulk shipping industry has experienced since the end of 2009.

Shipping capacity had a huge run over the past two years, driven by large placements of new ship orders, as companies expected global trade growth to continue at a record, fueled by China’s massive investment-led economic growth. A capacity growth below 7.0% is a relief to the dry bulk shipping industry, because growth has flirted around 7.0% for a while. This 7.0% growth is higher than China’s dry bulk demand growth of 4.5% reported during the first quarter of 2013 by RS-Platou, an international ship and offshore investment bank.

What the fall means

Lower capacity growth, driven by lower construction activity and continuous scrappage, may excite some investors and bid up the stock prices of dry bulk companies such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), Eagle Bulk Shipping Inc. (EGLE), and Navios Maritime Partners LP (NMM). This development, in addition to higher ship orders, has supported these companies during the first half of this year.

But current excess capacity growth is still a negative for dry bulk shipping companies’ revenues, because it will continue to pressure shipping rates, which negatively affects earnings and medium-term share prices—especially if several maturing contracts were drafted out above current market rates. If investors (the market) start to focus more on short-term fundamentals and become more risk-averse, share prices of dry bulk shipping companies will probably fall in the short term. Nonetheless, the current trend is positive for dry bulk shipping companies’ long-term outlook.

Learn more about the seven key shipping indicators

Continue back to Part 1 to see the list of other key shipping indicators.

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