Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of dry bulk shipper Navios Maritime Holdings (NYSE: NM) are sinking as much as 4.7% today following continued weakness in the Baltic Dry Index, or BDI, and a report over the weekend about "widespread delivery defaults by Chinese shipyards."
So what: China is the world's largest shipbuilder. It was reported that one in three ships were delayed in 2013. The shipyards are backed by the Chinese banks, and the delays are causing default fees to be charged against contracts and refunds to be delivered to purchasers.
Chinese shipyards won $37 billion in new ship orders in 2013, compared to less than $20 billion in 2012, a gain of 92% in just a year, according to Clarkson Research data.
Now what: The fear is that the shipyards are so behind on deliveries that they must be overwhelmed with orders. Too many orders can, in turn, bring overcapacity. Overcapacity leads to more weakness in the BDI. Weakness in the BDI leads to lower operating profits for companies such as Navios Maritime Holdings. The whole situation seems to echo one clear signal (whether ultimately true or not): brace for a flood of deliveries.
Navios Maritime Holdings has 12 Capesize ships that either operate based on the daily swings in the BDI, or which are under charter contracts that will be expiring this year. The chartered ships will be subject to the BDI once their contracts expire, or they will have to enter into new contracts at the prevailing rates at the time.
The flip side here is that the defaults should close the easy money spigot that has been financing the shipyards in the first place. If that takes place, the rate of future builds should slow down, which should help to correct the oversupply. It will be interesting to watch and see if the delivery situation eventually leads to a slowdown in orders and a reduction in global supply.