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 what’s demanded, 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 such as DryShips Inc. (DRYS),
Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), and Safe Bulkers
Inc. (SB).Capacity continues to grow ~7%Dry bulk capacity, measured in
DWT, grew 6.99% year-over-year for the last four weeks ending June 21, based on
the latest data available from IHS Global Limited. Year-over-year capacity
growth has hovered around 7.0% lately, after falling from near 10.0% at the
start of the year. This is a positive development for the dry bulk shipping
industry, but not enough to cover Jefferies’ estimated minimum dry bulk demand
growth of 6.0% for 2013 earlier this year. RS Platou, an international ship and
offshore investment bank, reported an increase of just 4.5% during the first
quarter this year. As a result, shipping rates have remained depressed
because of an elevated supply growth .Risk of lower-demand growth
risingAlthough analysts expect economic growth to be stronger during the
later half of 2013, shipping rates as well as utilization rates may be depressed
for longer, given that the interbank repo rate for Chinese banks recently
skyrocketed to a record and that prices for credit default swap insuring Chinese government
bonds climbed.
Shipping companies, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), and Navios Maritime Partners LP (NMM), are subject to further downside risks, as global trade grows less than capacity and shipping rates remain low. Companies such as Safe Bulkers Inc. (SB) and DryShips Inc. (DRYS) are also subject to maturing contracts that are drafted out above current market levels. While the Guggenheim Shipping ETF (SEA)—which invests in the largest shipping companies worldwide—is also subject to low shipping rates, it may be less affected because some companies have valuable contracts that mature after 2015.
Shipping companies, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), and Navios Maritime Partners LP (NMM), are subject to further downside risks, as global trade grows less than capacity and shipping rates remain low. Companies such as Safe Bulkers Inc. (SB) and DryShips Inc. (DRYS) are also subject to maturing contracts that are drafted out above current market levels. While the Guggenheim Shipping ETF (SEA)—which invests in the largest shipping companies worldwide—is also subject to low shipping rates, it may be less affected because some companies have valuable contracts that mature after 2015.