Even the “black sheep” of the shipping industry, DryShips Inc. (NASDAQ:DRYS), soared on whispers of potential market comeback. The stock is up 15% year-to-date, but, still, it hasn’t escaped the doldrums. DryShips Inc. (NASDAQ:DRYS) is on the ropes with mountainous liabilities. Yet, George Economou, the company’s CEO, is Chinese shipyards’ most lovable Greek customer.
At the moment, DryShips Inc. (NASDAQ:DRYS) has 10 dry bulk vessels on order, but it can’t afford their construction. So far, in order to cover the CAPEX associated with its newbuilding program, it has been sucking the life out of its subsidiary, Ocean Rig UDW Inc (NASDAQ:ORIG). Looking ahead, the company needs to raise $300 million through 2014, and I bet my bottom dollar it will have to get rid of more of its unfinished ships.
What’s really going on
Since 2010, scrapping activity has witnessed sky high growth rates fueling expectations for an improvement in the imbalance between global demand and tonnage supply. However, over the same period, shippers continued to spend money like water deploying their fleet. Despite the tight financing conditions, and the overall grim market environment, new buildings’ all-time low prices were too tempting to ignore:
Source: BRS Annual Review 2013
However, this recent flood of fresh orders could indicate that the competitively priced opportunities within the newbuilding market are drying up. So, ship owners are just trying to make hay while the sun still shines.
Recently, Ren Yuanlin, executive chairman of China-based Yangzijiang Shipbuilding, mentioned: “the bottom of newbuilding prices has been reached, and prices have firmed by 3-5% since the last quarter of 2012.” As of April 2013, the price for a new Capesize built by Chinese shipyards stood at $47-48 million, 3% higher from a 10-year low, and more than 50% below the 2008 peak. Shipbroker Clarkson Hellas says that shipyards in the Far East have already secured enough contracts to keep production going for at least another two years. Thus, major dry bulk carriers’ builders in China and South Korea have plenty of time to bargain on favorable pricing for 2016 deliveries, which, for now, remain held under the microscope.
It is true that shipyards around the world are feeling the squeeze of slashed shipping asset prices. If they truly intend to put their finances in the black, they have to stop accepting below break-even point orders. More importantly, Intermodal’s analyst George Dermatis noted in a recent report that inflationary pressures in China could push ship prices higher. Over the past decade, minimum wage went through the roof. On top of that, lately, Renminbi’s real exchange rate has been following a steady uptrend triggering a pick up in labor costs, and, consequently, in production costs. But, still, unless freight rates start to show signs of sustainable improvement, shipyards will continue clutching at straws.
Keep your fingers crossed for the struggling shippers
Greeks’ recent buying spree was partly backed by hopes that, upon delivery of their newbuildings, the gap between demand and supply will have been narrowed. Currently, newbuilding orders around the world account for about 20% of the existing dry bulk fleet with deliveries expected within the next three years.
Going forward, even though, there are market indicators, which suggest that the demand part of the equation might “save the day,” still, today’s freight rates look meager compared to the “golden days” of the shipping industry. Shippers hunger for new and advanced vessels, although, it does make sense in some cases, it is causing the market to move at a snail’s pace.
The article Is the Shipping Industry Ready for a Dynamic Comeback? No, It’s Not! originally appeared on Fool.com and is written by Fani Kelesidou.
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