Supply of ships is one of the two most important factors that affect tanker rates – the other being demand. When the industry is crowded with an excess number of ships, shipping firms have less bargaining power to negotiate shipping rates with buyers. Lower bargaining power means lower shipping rates, which will lead to lower revenues, earnings and free cash flows for tanker companies. On the other hand, lower available capacity will lead to an increase in shipping rates, generally a positive for tanker firms.
On April 5th, the number of available tankers for service fell from prior week’s 2,310 to 2,308 ships, according to IHS Global Limited. Capacity, measured in deadweight (dwt), fell from 372.5 to 372.2 million dwt. This is the second time since the beginning of 2013 that capacity has fallen on a week to week basis, and higher than the first 2013 reduction of 188,000 in dwt during the last week of January.
Tanker capacity fell as firms retired more ships than the number of new ships commencing operation.1 But what investors may want to focus on is the capacity growth rate, which has been declining from a peak of 8.36% in 2009 to a recent low of 4.15% in 2012 as ship order backlog fell (see “Firms increasing tanker purchases, shipping recovery progresses“).
Although the number of tankers on order has increased, tanker firms typically take 18 to 32 months to make a new ship; sometimes it can take as long as five years. Thus, in the medium to long term, investors should expect lower supply growth, which will be positive for shipping rates because it lowers rivalry (or competition) among shipping firms and reduces buyers’ bargaining power.
Lower buyer bargain power should lead to higher shipping rates, revenues, and earnings for tanker companies, such as Frontline Ltd. (FRO), Nordic American Tanker Ltd. (NAT) and Teekay Tankers Ltd. (TK). The Guggenheim Shipping ETF (SEA), which invests in large shipping companies worldwide and performs similar to the Dow Jones Global Shipping Index with an expense ratio of 0.65%, will also benefit.
- Unlike airplanes, storage options for ships are quite limited, which makes the industry supply more inelastic. ↩
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