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.
Tankers on order brushes last week’s poor China’s economic data
Last week, the number of tankers on order rose to a record since the start of 2013, increasing by 10 vessels to 148 ships, higher than the previous largest increase of 6 vessels recorded 2 weeks ago (see “Firms increasing tanker purchases, shipping recovery progresses“). This week’s increase also reversed last week’s loss of three vessels that went into construction (see “Tanker orders fall from last week, but trend remains positive“), pointing to the continuation of an uptrend.
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.1 Furthermore, it is interesting to see that managers are placing more orders, despite the poor economic data released from China last week that started the sell-off in commodities and major global markets (see “China’s industrial output misses estimates by 1.2%, shipping stocks drop“).
Brighter outlook ahead for tanker stocks, short-term risk remains
While tankers on order rose in 2010, the level of order stood at 30%, significantly higher than the historical norm. Given that shipping rates are at a record low, tankers on order are at levels just above 10%, and managers are unlikely to be very optimistic now (considering several firms are generating negative earnings now), recent order data is positive for the long-term outlook of the shipping industry. Nonetheless, as construction activity has yet to pick up pace (see chart above), the brighter outlook that managers are seeing may be farther out than investors think. Although there are several tanker stocks that investors can consider, such as Frontline Ltd. (FRO), Nordic American Tankers Ltd. (NAT), Teekay Corp. (TK) and Teekay Tankers Ltd. (TNK), investors may want to use the Guggenheim Shipping ETF (SEA) to diversify company specific risks and reduce exposure to bankruptcies.
© 2013 Market Realist, Inc.