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7 points that reflect tanker fundamentals say recovery isn’t looming (Part 3)

Continued from Part 2

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Crude tanker construction activity

The second indicator that investors look at is construction activity. This provides additional data, on top of crude tankers on order, about when managers want to receive ship deliveries so that they can generate maximum profits. If managers expect supply and demand differences and shipping rate increases further into the future, they’ll ask to receive the ship deliveries later. This will lower construction activity in the near term. So when construction activity isn’t rising, investors expect shipping rates to remain at current or lower levels in the short to medium term, which is negative for shipping companies in a depressed market.

Weak construction activity

While we’re seeing an overall turnaround in the number of ship orders, (see part 2), July 12’s update for construction activity remains negative for tanker firms. The indicator, which stood at 35 ships the week before, rose to 37. But it has been falling since April last year due to an oversupply of tanker ships, which is likely unfilled by weak demand (more on that in later parts of the series). As construction activity has historically fluctuated between 60 and 100, the current activity level just shows how oversupplied the tanker market is.

Interpretation

Until construction activity begins to rise, the tanker market indicates that managers aren’t in a rush to receive new orders for service. This means fundamentals will likely remain weak in the short to medium term—even though new orders point to a long-term investment opportunity. This is negative for tanker firms such as Teekay Tankers Ltd. (TNK), Nordic Nordic American Tanker Ltd. (NAT), Ship Finance International Ltd. (SFL) and Tsakos Energy Navigation Ltd. (TNP) over the short to medium term. On the positive side, falling construction activity means capacity growth will likely come down over the next few months, which would support the long-term outlook. If capacity growth falls below demand growth in the future, shipping rates will rise, and so will earnings and shares of these tanker companies.

This will also affect the Guggenheim Shipping ETF (SEA), which invests in large tanker firms that tend to have healthier financials.

Learn more about indicators that reflect tanker fundamentals

Continue on to capacity growth, Part 4, or go back to see the list of indicators, Part 1.

The Realist Discussions

  • yacker1

    I would keep STNG out of the crude tankers discussion.