15 December 2013

Dry bulk shippers scrap fewer vessels due to improved fundamentals:

Scrapping level and shipping rates

One indicator that analysts use to formulate supply growth projections is the number of ships retired. But while scrapping activity does limit supply growth and reduce rates, it’s best used for short-term assessment.

This is because the rate at which companies scrap ships often reveals whether the dry bulk shipping industry is facing excess capacity and depressed rates. When excess capacity pressures profits, firms will often retire older ships to relieve pressure on shipping rates and maintenance costs.

Deliveries and Scrapping

Companies scrap fewer vessels

During the first 9 months of this year, we’ve seen positive momentum in scrapping activity. While scrapping activity stood above 3 million dwt (deadweight tonnage) per month at the beginning of the year, it has fallen below 2 million dwt a month. Elevated levels of scrapping activity—such as the levels seen throughout the first half of 2011, the end of 2008 to early 2009, and most of 2012—have historically coincided with falling shipping rates.

Lower scrappage is positive

Companies and analysts often report the number of ships available to scrap as evidence of limited supply concerns, but the reality is that several ships do celebrate birthdays beyond 25. Managers are also unlikely to scrap ships just because they’re old and will often try to hold on to old vessels as long as they can find customers to use them.

New ship deliveries falling

At the same time that scrapping activity is falling, new ship deliveries have also fallen. Approximately just under 4 million dwt of vessels entered the industry in August and September. While still elevated compared to pre-2009 levels, this is an improvement. Lower scrapping activity and lower new ship deliveries are both positive for shipping rates and stocks like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), and Navios Maritime Holdings Inc. (NM). The Guggenheim Shipping ETF (SEA) will also benefit.

Source: market realist.

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