Continued from Part 3
The importance of capacity
Capacity, in a commoditized industry like shipping, is an important metric that directly impacts companies’ top line, or revenue performance. When capacity grows faster than demand, competition will rise among individual shipping firms as they try to use idle ships and cover fixed costs. This will lower day rates, which will negatively affect bottom-line earnings, free cash flows, and share prices for tanker companies.
Elevated supply growth
For the week ending August 2, tanker capacity measured in deadweight (the weight that a ship can safely carry across the ocean) grew 3.76% year-over-year based on data provided by IHS Global Limited. This is the lowest increase the industry has seen in at least five years. While ship orders (see Part 2 and Part 3) reflect managers’ expectations of future demand and supply, investors also look at capacity growth to get a sense of how fast current supply is growing and whether demand will meet it, instead of simply relying on managers, who can get caught up in the day-to-day operation without seeing the bigger picture.
Capacity growth hit as high as 11% and 8% in 2009 and 2011, as managers got too caught up with an increased flow of business before the financial crisis and over-ordered new ships. It has fallen since managers realized business wasn’t going to grow as fast as expected, which led to declines in new orders and a subsequent top in supply growth.
While this is a positive development, supply growth remains above demand growth. According to RS-Platou, an international ship and offshore brokers and investment bank, global shipments of oil fell 3.0% year-over-year during the first five months, which was worse than the 2.6% for the first four months. While the IEA (International Energy Agency) expects growth of 1.11% in oil demand this year, China’s weak import growth (due to last year’s stockpiling activity) and continued production growth in the United States would likely keep shipments growth near zero for 2013.
Effect on tankers
As we discussed in previous updates, capacity growth should fall further over the next few months because of low construction activity. But unless growth falls below demand growth, earnings for these companies are unlikely to improve, which bodes negative for tanker firms such as Tsakos Energy Navigation Ltd. (TNP), Ship Finance International Ltd. (SFL), Nordic American Tankers Ltd. (NAT), and Teekay Tankers Ltd. (TNK) this year. The Guggenheim Shipping ETF (SEA) has fared better, as several of its holdings that are listed in Japan and Europe have performed well.
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