<

Firms increasing tanker purchases, shipping recovery progresses

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

Legal ApologiesEnlarge Graph

Tankers on order increased the most since beginning of 2013

Last week, the number of tankers on order rose from 130 to 133 (see “Encouraging sign of tanker recovery: vessels on order rise most since early 2013“) — the largest increase since the beginning of 2013, suggesting shipping firms are becoming more optimistic with future expected demand and supply. This week’s data, the week ending April 5th of 2013, pointed to an acceleration in the number of new ship purchases as tankers on order rose by 6 to 139, making it officially the largest increase in the metric in 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).1

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 official manufacturing purchasing managers’ index (PMI) that tracks the strength of expansion and contraction for the country’s industrial sector (see “China’s manufacturing accelerates, but shipping stocks fell“).

Positive outlook for tanker firms in the long run

While day rates, the rates at which ships are rented out for transporting goods, will increase once the new vessels come online, it is 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 can be up to five years due to the amount of time it can take to build a tanker, and will benefit tanker stocks like Frontline Ltd. (FRO), Nordic American Tankers Ltd. (NAT) and Teekay Tankers Ltd. (TNK).

Yet, much short term uncertainty remains for individual firms’ financial health. To reduce exposure to a single company’s bankruptcy, investors can use the Guggenheim Shipping ETF (SEA), which invests in large shipping companies worldwide and will also benefit from this trend.

  1. Tankers on order records the number of ship orders that have been placed but have not gone into construction, whereas tankers orderbook also includes the number of ships under construction.