What tankers prices mean for the shipping industry
Prices of newbuilds can be a useful indicator of the tanker industry’s future fundamental outlook. When newbuild prices rise, they imply that companies are increasing orders for new ships. Shipping companies will often take this action only if they speculate future shipping rates (which can increase or stay the same from the current level) to be profitable enough to generate good returns from the new ships. Conversely, if future rates are expected to be unprofitable, then demand of new ships will fall, leading to lower ship prices.
VLCC price rises for first time since 2010
On July, newbuild price for VLCCs (very large crude carriers) were negotiated at $89 million, which is an increase of $1 million from June. These VLCCs are used to haul crude oil primarily from Africa or Arabian Gulf to major countries such as Japan, the United States, European countries, and China. This is the first increase we’ve seen since 2010. Prices for new ships have been falling since, as the world economy slowed, the United States continued to increase domestic crude oil production, and new deliveries added more than necessary fleets to existing supply.
The recent rise shows managers as a whole may be expecting tighter supply and demand dynamics ahead. That would mean higher shipping rates, earnings, and share prices for tanker companies like Frontline Ltd. (FRO), Nordic American Tankers Ltd. (NAT), and Teekay Tankers Ltd. (TNK).
Caution about using just one indicator
But investors may want to tread cautiously. Prices for smaller crude tankers have risen since the beginning of the year, but they haven’t contributed to higher rates like they did for product tankers. The increase in Aframax vessels could be attributable to an increase in demand for L2 product tankers of similar size, while Suezmax vessels may still be negatively affected because their travel routes overlap with VLCCs.
Plus, we’ve also seen ship prices for new builds increase in 2010. Yet shipping rates had continued to slump thereafter because of large quantities of new ship deliveries and weak customer demand. So this stresses the importance of investors also following tanker indexes and orderbooks. Until there’s confirmation that other indicators are also showing green lights, the trend remains negative for FRO, NAT, TNK, and Teekay Corp. (TK)(which owns TNK). The Guggenheim Shipping ETF (SEA) will also be negatively affected—although to a lesser extent because it’s diversified into other shipping sub-industries.
© 2013 Market Realist, Inc.