Shipping capacity growth drops but outpaces demand, negative for tanker stocks
The importance of capacity
In a highly commoditized industry, like the shipping industry, capacity is an important metric that directly impacts companies’ top line, or revenue performance. When capacity grows faster than demand, competition will rise among individual shipping firms as they try to use idle ships and cover fixed costs. This will lower day rates, which will negatively affect bottom line earnings, free cash flows, and share prices for companies such as Teekay Corp. (TK), Tsakos Energy Navigation Ltd. (TNP), Ship Finance International Ltd. (SFL), and Teekay Tankers Ltd. (TNK).
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Supply and demand growth
For the week ending June 21, tanker capacity measured in deadweight (the weight that a ship can safely carry across oceans) grew 4.31% year-over-year—lower than the previous week’s 4.35%—based on data provided by IHS Global Limited. Year-over-year capacity growth has fallen from the 2009 and 2011 highs of 11% and 8% (respectively) and is likely to fall more as construction activity drops further this year (see tanker ship orders under the Ship Orders driver for recent developments). Despite this fall, a 4.31% growth rate remains troublesome for the tanker industry because demand isn’t growing as fast as supply. An elevated supply growth will pressure tanker rates, which have remained depressed so far (see articles on tanker shipping rates under the Shipping Indexes driver to learn more about this outlook).
Since 2009, global oil trade growth has come to a halt, as the U.S. (the largest importer of oil in the world) began to rely less on imported oil, even as demand from China continued to grow. Oil production grew in the U.S. through the use of technologies called “hydraulic fracturing” and “horizontal drilling,” which made it possible to extract oil from areas where extraction was once considered impossible and uneconomical. As the latest data shows, the number of oil rigs in the U.S. continues to rise, and global oil trade growth is expected to remain weak—at least over the next couple of months (see U.S. oil production expected to hit record in 2013, negative for tankers under the Global Trade driver for details).
Effects on tanker companies
Due to excess capacity growth, tanker companies such as Teekay Corp. (TK), Tsakos Energy Navigation Ltd. (TNP), Ship Finance International Ltd. (SFL), and Teekay Tankers Ltd. (TNK) will continue to face short- to medium-term headwinds. The Guggenheim Shipping ETF (SEA), which invests in several tanker stocks, such as Nordic American Tankers Ltd. (NAT), Frontline Ltd. (FRO), and the companies mentioned earlier, will also suffer losses.
Visit our marine shipping industry driver page for more drivers and trends that currently affect the tanker industry to make better investment decisions.