Managers are expecting better days for dry bulk ships in the long run

Ship orders are useful metrics in uncovering 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.1 Since dry bulk ships usually take one to two years to construct, ship orders are more relevant to long term investment horizons.
Managers are expecting better days ahead
For the week ending April 12th, the number of dry bulk ships on order as a percentage of existing ships rose from 8.94% to 9.16%, an indication that managers placed new orders during the week. While the number of ships available for service fell by 1 ships due to the retirement of 17 carriers , the increase was largely driven by a higher number of dry bulk ships on order, which rose from 763 to 782 vessels.2
Long term changes in the number of dry bulk ships on order are showing stabilizing supply and demand growth balance in the shipping industry. Since mid 2012, the rate at which the indicator has declined faltered — depicted by the flatter slope — a sign that managers are starting to order more after a long period of absence due to overpurchases before 2008. In order other words, they are becoming more optimistic with the industry’s fundamentals in the near future.
Long term positive, near term cautious
But with shipping rates treading near recent lows and further capacity to be added in 2013, as the dry bulk orderbook indicator continues to fall at a rapid pace, investors will want to be a little cautious in the short to medium term. While dry bulk firms, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Eagle Bulk Shipping Inc. (EGLE) and Safe Bulkers Inc. (SB), will benefit positively in the long run from improving fundamentals, risk remains in the short to medium term, especially for companies that are in the red.
A way to get around company specific fundamentals is to invest in the Guggenheim Shipping ETF (SEA), which invests in shipping companies worldwide and generally performs similar to the Dow Jones Global Shipping Index. The companies that the ETF is invested in are less likely to go bankrupt because they are large companies with stronger financial health.
1.    Dry bulk shipping companies engage in the transportation of dry raw materials, such as iron ore, coal and grain across water.
2.    Dry bulk ships on order only includes ships that managers have placed for new deliveries in the future but have yet to commence construction.
Source: Market Realist