Why is capacity important?
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 utilize 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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June 7 update: Capacity grows 4.46%
For the week ending June 7, tanker capacity measured in deadweight tonnage (the weight that a ship can safely carry across ocean) grew 4.46% year-over-year based on data provided by IHS Global Limited. Although year-over-year capacity growth has fallen from 2009 and 2011 highs of 11% and 8% (respectively), a 4.46% 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 Shipping Indexes driver for more information on the current situation).
Since 2009, global oil trade growth came to a halt as the United States, 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 United States through technologies called hydraulic fracturing and horizontal drilling, which made it possible to extract oil from areas that were once considered impossible and uneconomical. As the latest data shows, the number of oil rigs in the United States continues to rise, and investors expect global oil trade growth 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 our 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 be negatively affected. On a positive note, capacity growth will likely fall from current levels as the number of ships under construction falls further (for more information, see analysis related to ship orders’ impact on Marine Shipping firms under Ship Orders).
© 2013 Market Realist, Inc.