Continued from Part 2
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 farther 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 can 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. On the other hand, lower construction levels will translate to lower capacity growth in the future.
Weak construction activity
As ship orders remain weak, even though they’re hinting at a potential recovery in the near future (see Part 2), so does construction activity. While we saw an increase of one vessel in the number of ships under construction on July 26 from July 19, the figure fell by two ships on the week ending August 2. The number of ships under construction now stands at 35, the lowest total seen in years. As construction activity has historically fluctuated between 60 and 100, last week’s data shows how oversupplied the tanker market is and that there isn’t enough demand to soak up excess capacity.
Another indicator of a weak recovery
Until construction activity begins to rise—and one week of data doesn’t confirm a rise—the indicator shows 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. This is negative for tanker firms such as Teekay Tankers Ltd. (TNK), 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 the 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
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