Tanker construction activity is a good indicator for oil shipping demand and supply. When managers are expecting higher demand to supply growth in seaborne oil transportation, orders for new ships will be placed, which increases construction activity. Construction levels fall behind its sister metric, order levels, because there is a lag period between order placement and construction commencement. However, construction levels are useful in revealing how many ships are in backlog that may be delivered soon.
Construction level continues to fall
Construction level for crude tankers has fallen below a key level of 60 ships at the end of 2012. February 22nd of 2013’s data from IHS Global Limited, a global research company, shows that the number of ships under fell to 42, after hitting recent high of ~100. The lower level of construction activity suggests that ship manufacturers have worked through most of its backlog and they are running out of work to do.
Tanker construction is pointing at much favorable supply to demand balance
Whilst this is negative for ship manufacturers, it is positive for the shipping companies. Shipping companies placed excess orders before 2008 that industry revenue and profitability have fallen significantly since, due to higher competition arising from over supply. Lower construction level signals and fewer ship deliveries going forward point to a more favorable supply to demand balance. Construction activity may stabilize in the second half of the year when new orders are being put to work. Combined with the industry’s order level for new ships, managers may already be optimistic with demand growth and the industry’s supply to demand balance (see “Tanker order may be bottoming, opportunities ahead“).
Solid performance should follow
Investors may see solid performance among tanker companies such as Scorpio Tankers Inc. (STNG), Nordic American Tanker Ltd. (NAT), Knightsbridge Tankers Ltd. (VLCCF) and Teekay Corp. (TK), if they do not go bankrupt and Asia’s economic activity continues to pick up momentum over the next few months or years.1 The Guggenheim Shipping ETF (SEA), which holds investments in several leading shipping companies, should also benefit from this encouraging data.
© 2013 Market Realist, Inc.