Why shipping construction remains negative while ship orders for tankers rise
Significance of ship orders
Orders for crude tankers often reflect shipping companies’ expectations of future supply and demand. Managers often place new orders when they expect future demand to increase more than supply, on the condition that they expect to generate profit with the investment. When managers expect excess capacity to continue or grow, they refrain from placing more orders, sometimes even delaying them for a price. Since tankers generally take more than two years to construct (sometimes up to five years), the metric is often more relevant to long-term investment horizons.
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Early sign of recovery
For the week ending June 28, the number of crude tankers on order stood at 6.66% of existing vessels, as published by IHS Global Limited on Friday.1 While lower than the 6.71% we saw the prior week, the slight fall is normal in a recovering market because companies will venture out slowly when ordering new ships, so that they don’t over-purchase and harm industry profitability again.
Since a year ago, the number of crude tankers on order began basing, as shipping companies returned to the market to place new orders in anticipation of a supply shortage in the long term. Because managers are often slow to adjust to changes in demand and the short-run supply curve is inelastic (meaning its supply and demand aren’t affected by price changes and a small increase in demand can significantly move the price of the good), shipping rates will likely rise from their current depressed levels within the next few years.
The crude tanker orderbook, which includes tankers under construction, stood flat week-to-week at 10.35% as a percentage of capacity in deadweight (DWT), a weight measure of the amount that a ship can safely carry across ocean. Investors look at the orderbook because it provides additional data that factors in when managers want the ships to be delivered in order to generate maximum profits from their ships. If managers deem supply and demand balance to be unfavorable within two years, they may ask to push the delivery further out into the future, which lowers construction activity in the nearer term.
Short-term and long-term outlooks differ
Over the past few weeks, most of the increase in tanker orderbook has come from new orders and not necessary construction levels. Historically, the number of tankers under construction ranged between 60 and 100 ships. On June 28, the figure was 36. While it has stayed at 36 for four weeks now, we need more time until we know for sure that fundamentals are improving. As of now, it seems managers are in no rush to receive these new orders for service, and fundamentals will likely remain weak in the short to medium term—even though new orders point to a long-term investment opportunity.
This would be negative for companies such as Teekay Tankers Ltd. (TNK), Nordic American Tanker Ltd. (NAT), Ship Finance International Ltd. (SFL), Tsakos Energy Navigation Ltd. (TNP), and Scorpio Tankers Inc. (STNG) in the short to medium term, as well as the Guggenheim Shipping ETF (SEA). Investors expecting a strong recovery in the tanker industry this year may be disappointed.
Investors should review other drivers to see what’s currently driving the tanker shipping industry. Some must-reads include Shipping capacity growth drops but outpaces demand, negative for tanker stocks, Must-read: Financial woe abroad drags tankers down, outlook negative, Why oil price is a key driver of tanker stocks, Research shows China’s soaring housing prices actually support tanker firms, and Oil rig activity stays high, negative for oil shipping.
- Analysts often common-size order figures as a percentage of existing capacity or existing ships to factor in growth of ships over time. ↩