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.
Weekly tanker growth in negative territory
Between August 16 and 23, tanker capacity measured in deadweight tonnage (the weight a ship can safely carry across the ocean), fell by 0.04% for crude tankers and 0.01% for product tankers using the last eight weeks to smoothen out the data. The recent decline in growth rates appears to reflect lower shipping rates. When shipping rates are at depressing levels and shipping companies can’t profit by running the new or existing ships, companies will delay receiving new ships or scrap ships to reduce capacity and support rates. This could act as a short-term support for shipping rates.
Annual capacity growth falling
While annual capacity growth still remains above 3.5% for crude tankers and even higher for product tankers, it has come down since April, which is a positive sign. Analysts consider year-over-year growth because it adjusts for possible seasonality and short-term noise, and demand figures are often quoted on a year-over-year basis for the same reasons.
Interpretation of higher growth
The declines we’ve seen in weekly capacity are a positive sign that incumbent firms are resorting to scrapping and slippage to alleviate issues with excess capacity and support shipping rates. Nonetheless, this also means that if shipping rates are to rise further from here—as they often do because of seasonal increases in demand for heating oil for the winter—capacity growth will likely rise.
Depending on whether demand is expected to meet supply, current capacity growth could be negative or positive for tanker firms such as Frontline Ltd. (FRO), Nordic American Tanker Ltd. (NAT), Navios Maritime Acquisition Corp. (NNA), and Scorpio Tankers Ltd. (STNG). This information is listed in our Marine Shipping page. While this forecast also applies to the Guggenheim Shipping ETF (SEA), the ETF is also affected by fundamentals of international shuttle tankers, LNG (liquified natural gas) carriers, container ships, and to a smaller extent, dry bulk ships.1
- STNG and NNA focus on product tankers, while FRO and NAT focus on crude tankers. ↩
- Part 1 - Orderbook shows divergence between product and crude tankers
- Part 2 - Why the tanker industry sees negative weekly supply growth
- Part 3 - Rates for product tankers continue to outperform crude tankers
- Part 4 - Must-know: Are we seeing the start of a crude tanker turnaround?
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