Tanker orders fall to higher construction, basing continues
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Activities for ship orders can often show managers’ perspectives on the tanker industry’s future outlook and profitability.1 When managers are optimistic with future supply to demand balance, and expect profitable returns off of new ship purchases, they will often place orders for new ship builds. As tankers can take up to five years to construct, higher new orders points to a long term positive for the industry.
For the week ending March 8th 2013, the number of tankers on order fell to 127 from 129 the prior week, after lying flat at 128 for four weeks before that (see “Little excitement brewing among tanker stocks“).2 Although initially negative, the number of ships on order has generally stabilized over the past few months.
Additionally, the decline in the number of orders from 129 to 127 may be attributed to an increase in new construction starts, which rose from 42 to 43 ships over the week. Whether this is the bottom for the tanker industry is difficult to say, because order and construction levels can continue to fall as industry ship utilization is significantly lower than historic averages. Investors should also look into movements in tanker rates to get a sense of whether supply and demand balance is improving or not in the short to medium terms.
The two metrics together suggest improvements in the long term profitability outlook for tanker companies such as Frontline Ltd. (FRO), Knightsbridge Tankers Ltd. (VLCCF), Nordic American Tanker Ltd. (NAT) and Teekay Tanker Ltd. (TNK). To reduce exposure to company specific risks, investors seeking returns for long term returns can consider investments in the Guggenheim Shipping ETF (SEA), which seeks returns similar to the Dow Jones Global Shipping Index with tanker firms occupying roughly 40% of the industry’s total revenue, according to IHS Global Limited.