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Tanker order may be bottoming, opportunities ahead

Legal ApologiesEnlarge GraphInvestors can get a good sense of the shipping industry’s fundamentals by looking at companies’ ship orders. When demand for shipping is growing, or expected to grow, more than supply of ships, companies as a whole will seek to purchase more ships. Therefore, rising orders for ships suggests a positive outlook ahead whereas falling orders are negative.

Orders for crude tankers have leveled off at 128 ships for the past 4 weeks while orderbooks as a percentage of current capacity continued to fall.1 A few weeks ago, we suggested the possibility of a bottom in new orders (see “Falling tanker orderbook level supports bearish fundamentals“). This week’s data suggests that might be happening now.

Companies have aggressively scaled back new orders since 2009 when they realized they had overestimated future trade growth and overbooked new ships. Ship orders tend to fluctuate within a range (like before 2006 for example) as old ships are replaced and new ships are demanded to meet growth in trade volume. The stabilization in the number of new ships on order suggests that the industry may be stepping up purchases to replenish orders that have gone into construction. Likely, managers are seeing higher growth in trade volume ahead. Not to mention the order level is at least at a decade low.

This is positive for the tanker industry and respective companies such as Frontline, Ltd. (FRO), Teekay Corp. (TK) and Knightsbridge Tankers Ltd. (VLCCF). A bottom in new orders should also benefit the Guggenheim Shipping ETF (SEA) that invests in leading shipping companies and performs similar to the Dow Jones Global Shipping Index.

  1. Orders are defined as purchases that have not commenced construction whereas orderbook also includes orders that are under construction.