Continued from Part 7
The importance of ship prices (vessel values)
The final indicator that investors use to assess the fundamental outlook of the tanker industry is ship prices and vessel values. When tanker rates are expected to rise or are rising, the value of ships themselves goes up. This can happen two ways. First, when new or incumbent companies expect earnings to increase or experience rising profits while ship prices have not, they will purchase ships in the secondary market to resell them at higher prices until they believe the market has priced them in. These firms may also charter ships out, expecting that they have acquired the assets at a cheaper price than what the true earnings of the ships are. Both cases will lead to higher ship prices.
Second, if the seller is expecting higher earnings soon (usually because of higher tanker rates), they will also be unwilling to sell ships at their current price and will only sell them at a higher price that they think is more than fair. Alternatively, if the sellers expect lower earnings, they will have to lower their ship prices. Otherwise, buyers will not buy them. This works just like stocks traded in the market: when investors expect companies’ earnings to rise, share prices will rise—but when they don’t, share prices will fall.
Fifteen-year-old crude tankers
Prices for 15-year-old crude tankers as a whole have fallen since the peak of 2008. While there were slight improvements throughout 2010 and during the second half of 2012, due to higher imports out of China, they didn’t last long. What’s important to note here is that ship prices are not a perfect reflection of when a recovery will take place, as they reflect the market’s perspective, and the market can be wrong. When tanker rates do recover, however, prices for ships should also turn around. But investors should look at a couple of indicators—not all indicators—to get a picture of the industry’s fundamentals from different angles in order to make better judgements.
New build prices
Perhaps a more reliable indicator is new build prices. Because new builds take several years from the placement of orders to delivery (unlike 15-year-old ship vessels, which can sell right away in the market), prices for new builds often reflect the long-term outlook of the tanker industry. Yet the indicator is also not bulletproof since prices rose during mid 2010 amid higher oil imports from China and lower capacity growth.
As ship prices have yet turned around, they indicate that tanker rates will continue to remain depressed, which will be negative for tanker stocks such as Teekay Tankers Ltd. (TNK), Tsakos Energy Navigation Ltd. (TNP), Nordic American Tanker Ltd. (NAT) and Frontline Ltd. (FRO). They will also negatively affect the Guggenheim Shipping ETF (SEA).
Investors should track multiple useful indicators
But those who understood that there was still a large backlog of new ships that will continue to flood the industry by looking at ship orders (see Part 2 and Part 3) would have known capacity growth would remain high. This also raises the need for investors to look at China’s economic growth outlook, because it can have a significant impact on tanker rates. Market Realist publishes indicators that reflect fundamentals in China underneath our Macro Trends page.
Go back to Part 1 to see the list of indicators.
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