In a highly commoditized industry like the shipping industry, capacity is an important metric that directly impacts companies’ top line, or revenue performance. When capacity grows faster than demand, competition will rise among individual shipping firms as they try to utilize idle ships and cover fixed costs.This will lower day rates, which will negatively affect bottom line earnings, free cash flows and share prices for companies such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Knightsbridge Tankers Ltd. (VLCCF) and Safe Bulkers Inc. (SB).
Capacity rises least year-over-year in week ending April 19th
For the week ending April 19th, dry bulk ship capacity rose by 0.07% to 595.98 million dwt.1 On a year-to-year basis, capacity increased by just 7.10%, the smallest increase in 2013 and lower than last week’s 7.32% increase. The lowest increase follows the on-going trend of fewer new deliveries, and continued scrappage of older ships.While a reduction in capacity is generally positive for shipping rates, whether shipping rates will benefit right away or not is questionable. This is because firms tend to retire ships that are older, which are more fuel inefficient and more expensive to maintain. As capacity utilization is below 85%, the marginal shipping rate that a customer is willing to pay for could be less than the marginal cost of operating the ship that was just broken up.Shipping rates supported by fewer new ship deliveries
Shipping rates have likely been supported by fewer new ship deliveries. With a majority of ship orders delivered in 2011 and early 2012, the pace at which new ships entered service fell, marked by the slope of the decline in the Dry Bulk Orderbook from mid 2012 onward in the chart above. Lower growth rate has also supported the baltic dry index, which is an indicator that reflects the daily equivalent shipping rate for transporting dry bulk materials in the spot market.
As supply continues to grow, dry bulk firms, such as DRYS, DSX, SB, and VLCCF will continue to face headwinds in the short to medium term.Nonetheless, the lower growth rate seen in capacity since mid 2012 is a positive development, and is a sign of better times ahead for the companies mentioned earlier. But investors should be aware that some of these firms may go bankrupt if they are unable to pay maturing debt or interest. Thus, for a more diversified approach, investors may also want to consider the Guggenheim Shipping ETF (SEA), which invests in the largest shipping companies worldwide.
WORLD SHIPPING
28 April 2013 - 22:20
Ship capacity grows positively by just 7.1% last week, lowest since 2013
In a highly commoditized industry like the shipping industry, capacity is an important metric that directly impacts companies’ top line, or revenue performance.
WORLD SHIPPING
28 April 2013 - 22:20
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