The demand side of the equation continues to escalate for shipping companies such as DryShips (DRYS), Diana Shipping (DSX 2.02%), Navios Maritime Partners (NYSE: NMM), Baltic Trading Limited (NYSE: BALT), and Safe Bulkers (NYSE: SB). Daily market rates have started to climb again. The bigger question for now involves whether the global ship supply situation will ruin the party.
The latest supply concern from Goodgal
Hedge fund manager and shipping expert Jay Goodgal has warned for some time that investors, analysts, executives, and other experts have their positive outlooks all wrong. Part of his reasoning has to do with the over-optimism itself as it has led to more orders from ship owners.
For January, the orderbook increased by a staggering 4.3% in terms of deadweight tons and 3.1% in terms of vessel numbers for that single month alone. These are net of new deliveries since the orderbook represents the total amount of ships that are still on order but not yet delivered.
For February, the orderbook maintained a slower growth rate but the growth still remained strong. It tacked on a net 0.5% in terms of tonnage which comes out to a 6% annual rate. This has resulted in a 4.8% total gain in 2014 already and ten months still remain to go. Goodgal points out that the same analysts, executives, and investors who have forecast a sustained recovery have also forecast a decline in the orderbook for the last 14 months. Despite this, the order flow has continued to increase with a total rise of 13.8% during that same time-frame.
Diana Shipping appears to be one of the few of the group that has even hinted at supply concerns. President Anastasios Margaronis said, "If newbuilding orders do not flood the markets with vessels this will certainly be a positive factor for...earnings going forward." Diana Shipping's "if" fear may be becoming reality.
Meanwhile, deliveries of ships here and now have also continued to expand at a rapid pace and ship owners have delayed sending in their old ships to be scrapped. The global delivered fleet increased by 1.6% for the first two months of the year.
The only type of ships that have not seen excessive growth are the smaller Handysize ships and Goodgal warned that these exist within "a more challenging sector for new/inexperienced operators/investors."
What's worse is that much of the new ships are bigger and more fuel-efficient. This increased fuel efficiency means that these ships can travel faster and make more trips in a year. This results in even larger annual shipping supply than the simple percentage increases reveal.
Demand is not even a given
According to Goodgal, not just the supply situation appears worrisome. He, like just about everybody else in the industry, calls China "the main economic juggernaut for the dry bulk market." However, China's GDP remains under pressure and forecasts call for it to be "flexible." This implies that it could easily come in below target. Any unexpected growth slowdown for China, in combination with increased capacity, "represents a serious challenge for a dry bulk shipping industry."
Fools should continue to monitor the economic situation in China, the orderbook, the global fleet supply, the daily spot rates, and what Goodgal has to say. Goodgal may ultimately prove to be wrong, but it's always a good idea to pay attention to what the contrarian lone wolf has to say to make sure that you have a balanced perspective on all issues. When the industry reaches a top, whether it's short-term, later this year, or not for ten years, by absorbing as much information as possible you can increase your chances of predicting the next down-cycle ahead of the crowd.