Tanker orders can be used to reflect oil shipping company managers’ expectations of future supply and demand. 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 generally take more than two years to construct, and sometimes up to five years, the metric is often more relevant to long term investment horizons.
Tanker on order falls but overall trend remains up
Last week, the number of tankers on order saw the largest increase since the start of 2013, rising from 133 to 139 (see “Firms increasing tanker purchases, shipping recovery progresses“). For the week ending April 12th, the figure fell to 136. While the drop may be discouraging, the figure continues to hold above the average of ~130 for the past two months.
This is an encouraging sign, given that orders for crude tankers have been falling for the past four years, reaching a record low as managers held back placing new purchases due to an enormous backlog that was created before the financial crisis (see chart below).1
Furthermore, it is natural for the order level to drop from time to time as new orders enter construction and managers remain cautious with placing additional purchases. As long as the overall trend moves higher, it is a positive sign for the shipping industry. Given supportive data coming out of China’s recent import and manufacturing activity (see “China’s import value hits record supporting shipping, media widely unnoticed” and ”China’s manufacturing accelerates, but shipping stocks fell“), the overall trend favors the upside.
Tanker fundamental remains positive 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 take 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.
- 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. ↩
© 2013 Market Realist, Inc.