It seems like everybody these days universally agrees that the dry bulk shipping market will get better at least in the short term. Executives from DryShips (NASDAQ:DRYS), Navios Maritime Partners (NYSE:NMM), Diana Shipping (NYSE:DSX), and other carriers have voiced optimism about increased demand for 2014. Even if that optimism is realized, there is another very important factor to watch that could ruin the whole thing.
The supply side
Everybody seems confident that the global supply of dry ships won't keep up with demand, which would result in shipping rates shooting up. For example, DryShips CEO George Economou stated, "Following a period of oversupply the recent volatility in the tanker and drybulk sectors is a clear sign of a balanced supply demand picture."
Meanwhile, DryShips CFO Ziad Nakleh concurred. He said, "The supply demand balance is tighter than anticipated." Nakleh points out that the order book for new ships has been in steady decline over the last five to six years.
Nakleh went on to say in more detail, "To sum up we believe that the fears over severe oversupply may have been overstated. And the depressed freight environment we've experienced during the past several years was more a result of lackluster demand rather than an oversupply issue, a situation we see reversing in the coming years."
Game, set, match, right? Not so fast.
Nakleh went on to say, "While the order book has been expanding recently on the back of the improved market outlook and freight environment, we believe that it still remains at manageable levels as we expect demand growth to mitigate the fact of further addition to the fleet." It sounds like he's trying to play down the sudden increase in orders, justified or not, while remaining quite confident about rates for the industry and DryShips for 2014.
Could it simply be a situation where the expected jump in demand and expected low supply actually cause higher supply instead? What dry shipper wouldn't want to expand its fleet, if it can afford it, if it knows that rates are going to jump to highly profitable levels?
Perhaps Diana Shipping gives us a more balanced, implied warning. Diana Shipping mentioned, "If newbuilding orders do not flood the markets with vessels this will certainly be a positive factor for Capesize earnings going forward." The key word being "if" which leaves the possibility, and rightful concern, that new orders could come and flood the market, killing the whole supply-side theory.
The positive flip side
If Navios Maritime Partners is correct, an increased order book isn't as big of a concern as you might think. Navios Maritime Partners sees around 30% "non-deliveries," (which is delayed, postponed, or cancelled orders) for 2014. Probably the biggest reason many executives see supply coming down is the vast number of ships in the global supply that have aged and are overdue to be scrapped.
According to Navios, scrapping levels continue to be well below expectations, meaning that very old ships are being used beyond their expected lifespan until the last possible minute. CEO Angeliki Frangou of Navios Maritime Partners is simply amazed that there hasn't been more scrapping, but she went out on a limb and said, "Definitely you will have more scrapping in 2014 that will be the way forward."
Foolish final thoughts
The Korean Shipping Messenger put it best: "Unless demolition activity picks up significantly from the low levels seen thus far this year all estimates of a healthier market going forward could be at risk in spite of the slowing down of newbuilding deliveries." Watch like a hawk for new scrapping information as this single indicator can potentially make or break the entire dry shipping industry this year and beyond.