Encouraging sign of tanker recovery: vessels on order rise most since early 2013

Tanker orders often reflect what oil shipping company managers’ expectations of future supply and demand are. Managers will often place new orders when future demand is expected to increase more than supply, given that they can generate profit with new tankers. Since tankers can take up to five years to construct, the metric is often more relevant to long term investment horizons.

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Managers placed the largest number of ships last week

For the week ending March 29th of 2013, the number of crude tankers on order, which excludes orders that are under construction, rose by 3 ships to 133, marking the largest increase since the beginning of 2013. This is an encouraging sign, given that orders for crude tankers have been falling for the past four years as managers held back placing new purchases due to an enormous backlog that was created before the financial crisis (see chart below).

The largest increase in the number of orders of crude tankers since the beginning of the year is likely due to two factors: 1) a record low backlog that leaves room for new orders when future expected supply cannot meet demand, and 2) higher manufacturing activity in China, as reported in the latest HSBC flash manufacturing PMI (purchasing managers’ index) that tracks the strength of expansion and contraction for the country’s industrial sector (see “HSBC’s early PMI shows sustained recovery, shipping demand to rise“).

How will this affect shipping companies?

While day rates, the rates at which ships are rented out for transporting goods, will increase once the new vessels come online, it is generally acknowledged within the manufacturing industry that firms are often slow to adjust to changes in demand. Therefore, the price of transporting oil will increase in the meantime, which will benefit tanker stocks, such as Frontline Ltd. (FRO), Nordic American Tankers Ltd. (NAT) and Teekay Tankers Ltd. (TNK). As tankers make up 40% of the global shipping industry’s revenue, the Guggenheim Shipping ETF (SEA), which invests in large shipping companies worldwide, will also benefit over the long term.