Continued from Part 1
The significance of ship orders
One measure that reflects managers’ assessment of future supply and demand differences is the number of ships on order. When managers expect future demand to increase more than supply, if they also expect to generate profits with the investment, they will often place new ship orders. But when managers expect excess capacity to continue or grow, they will refrain from placing more orders—sometimes even delaying them for a price. So the number of ships on order rising is a positive sign that shipping rates will likely rise in the future. 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.
Early sign of recovery
For the week ending July 26, the number of crude tankers on order as a percentage of existing ships stood unchanged at 6.45%, as published by IHS Global Limited last Friday.1 Orderbook as a percentage of existing capacity in deadweight tonnage fell from 9.88% to 9.82%.
Managers have returned to the shipyard to sign contracts for new ship constructions since the beginning of the year. But the weak turnaround in orders shows that companies aren’t too optimistic about the long-term outlook of the industry’s profitability and that much uncertainties remain. Perhaps Scorpio Tankers Inc. (STNG), which has been ordering fuel-efficient ships aggressively, is the only major company that’s driving ship orders up and an industry-wide recovery isn’t there yet.
Normally, rising ship orders are a positive indication of higher shipping rates in the future. As we haven’t seen ship orders fall below 6.0%, the current trend in ship orders is still positive and supports the theory of a shipping recovery. Tanker companies such as Scorpio Tankers Inc. (STNG), Nordic American Tanker Ltd. (NAT), Ship Finance International Ltd. (SFL), and Tsakos Energy Navigation Ltd. (TNP), as well as the Guggenheim Shipping ETF (SEA), should perform well in the future. But the weakness and data also raise some key questions about who’s buying these assets. Is the ordering mostly by one company, or is it an industry-wide thing? This makes us question how much of the expectation of a shipping recovery (higher future demand growth relative to supply growth ) applies to a few years from now, since tankers can take up to five years to construct.
Learn more about indicators that reflect tanker fundamentals
- Analysts often common-size order figures as a percentage of existing capacity or existing ships to factor in growth of ships over time. ↩
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