Ship order reveals short run negative and long run positive for shipping

Time:2013-05-29 Browse:59 Author:RISINGSUN
Ship orders can be used to uncover managers’ perspectives of the industry’s long-term demand and supply balance. Dry bulk shipping companies will often place new orders when future demand is expected to increase more than supply, on the condition that they expect to generate profits with new bulk vessels. Since dry bulk ships usually take one to two years to construct, ship orders are most applicable to long-term investment horizons.


Vessel order update


For the week ending May 17th, the number of dry bulk ships on order as a percentage of existing number of ships rose slightly from 9.06% the prior week to 9.09% this week. While the measure has fallen from its recent high of 9.31% on April 19th, it is encouraging to see that the indicator has not fallen below the low of 8.94% this year, suggesting managers are still optimistic in regards to the long-term prospect of the industry.


During the same week, dry bulk order book as a percentage of existing capacity measured in deadweight (dwt), which includes ships under construction, also rose from the prior week’s 16.50% to 16.55%. However, the overall trend remains down. Falling orderbook is a short-term negative for shipping companies because it suggests industry supply grew more than the number of new orders that shipping companies have placed.


Maintained short run negative and long run positive outlook


As recent data shows, capacity has grown at 7.0% year-over-year, outpacing demand growth. According to Eagle Bulk Shipping Inc. (EGLE)’s first quarter earnings call, shipping rates will likely remain low in the short run. This is negative for shipping companies, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM) and Safe Bulkers Inc. (SB). In the long run, however, the industry should emerge from depressed earnings levels. Several managers have begun taking advantage of low vessel prices in anticipation of higher demand in 2014 and onward.


Diana is best positioned to take advantage of an industry recovery because most of its near-term maturing contracts are settled at current market rates. If shipping rates rise, Diana will be able to capitalize on higher contract rates. If shipping rates fall or stay constant, it has less to lose compared to other firms with more valuable contracts, which provides a favorable asymmetric return to risk opportunity . Investors can alternatively invest in the dry bulk shipping industry through the Guggenheim Shipping ETF (SEA). The ETF performs similar to the Dow Jones Global Shipping Index by investing in large shipping companies worldwide. It has also outperformed other industrial sectors, such as coal and steel, this year.