Tanker rates reflect fundamentals
Crude tanker rates are often followed by investment analysts to see whether industry fundamentals are improving or not. When tanker rates are rising, they are often an indication of improving fundamentals. While they are not primary drivers, the metrics are widely available for the public and serves to show short, medium, or long term supply and demand balance.
Shipping rates have moved sideways over the past three years
Since making a record low of below 500 in 2009 due to the financial crisis, the Baltic Dirty Tanker Index has fluctuated between 600 and 900. The index compiles time charter rates from various firms on a daily basis, and generally reflects the price at which ships are rented out per day. As companies in the industry primarily compete on price, the industry is highly competitive. However, tankers can take up to five years to construct. Thus, shipping rates can be volatile when demand changes even just a little.
Tanker firms continued to fall during the same period
While the tanker index has largely fluctuated between 600 and 900 over the past three years, tanker firms such as Knightsbridge Tankers Ltd. (VLCCF), Frontline Ltd. (FRO), Nordic American Tanker Ltd. (NAT) and Teekay Tankers Ltd. (TNK) have continued to move lower over the period. This is because companies often engage in long term contracts of more than one year, which protects them when time charter rates fall. When the long term contracts expire, however, share price can plunge as historically higher rates that were signed before 2009 are replaced with lower rates. This will reduce revenue and incoming cash flow for the company. While institutional investors may know this, retail investors may not, since most do not look at individual company financial reports.
A method of diversification: ETF
To reduce exposure to a specific company’s expiration of long term contracts, investors can take advantage of the Guggenheim Shipping ETF (SEA). The ETF invests in 27 large shipping companies worldwide and corresponds generally to the Dow Jones Global Shipping Index. As of March 19th, the fund required an expense ratio of 0.65% and a dividend yield of 3.2%.