Orders for new ships is an important measure of supply and demand balance in the tanker (oil shipping) industry. When managers expect demand to outpace supply growth in the future, they will place more orders. As tankers can take up to five years to construct, shipping rates for transporting oil will rise – and so will companies’ earnings in the meantime.
For the past four weeks, crude tankers on order stood at a constant level of 128 ships while orderbook as a percentage of existing capacity continued to fall (see “Tanker order may be bottoming, opportunities ahead“).1 Order levels for tankers often move within a range as companies need to replace retiring ships and meet growing demand as global production rises. However, over-optimism among managers caused firms to place more orders than necessary creating an oversupply situation that has dampened the outlook going forward.
With ship orders at a record low, last week’s article suggested the possibility of a bottom in the tanker industry. This week’s data, released by IHS Global Limited, further supports the theory as the number of ships on order increased to 129 from 128. Although this is just an increase of one, it is a positive sign, especially given the unpleasant news over the past two weeks regarding Europe and China’s manufacturing activities.
Since company managers often disregard short term fluctuations in the economy, an increase in tanker orders is a positive indicator for investors looking to invest in the industry for the medium to long run. Some tanker companies that will benefit are Knightsbridge Tankers Ltd. (VLCCF), Nordic American Tanker Ltd (NAT), Teekay Tankers Ltd. (TNK) and Ship Finance International Ltd. (SFL). For a more diversified approach, investors can consider the Guggenheim Shipping ETF (SEA), an ETF that invests in leading global shipping companies and performs similarly to the Dow Jones Shipping Index.
- Tankers on order are orders that have been placed but have not commenced construction, whereas orderbook also includes ships that have gone into construction. ↩