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 often place new ship orders. But when managers expect excess capacity to continue or grow, they 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.
August 9 update
For the week ending August 9, the number of crude tankers on order as a percentage of existing ships slipped to 6.34% from 6.46% the week before, as published by IHS Global Limited last Friday.1 Orderbook as a percentage of existing capacity in deadweight tonnage, on the other hand, rose from 9.74% to 9.82% over the same period.
Ship orders turn around
Since the beginning of the year, we saw managers returning to the shipyard to sign contracts for new ships to be constructed. As a result, we saw a turnaround (or possible turnaround) in the number of ships on order and the orderbook. This was encouraging, as it reflects managers’ optimism regarding the long-term outlook of the tanker industry.
Key question raised
But the weak turnaround in orders shows that fundamentals aren’t as strong as managers thought, with many uncertainties remaining. Plus, the weakness in the data raises some key questions about who’s buying these assets. Are orders coming from a few major companies, such as Scorpio Tankers Inc. (STNG), which has been aggressively placing new orders for fuel-efficient ships, or is it an industry-wide trend? Perhaps there are only a handful of companies driving up orders and an industry-wide recovery isn’t there yet.
Activity remains weak
Tanker companies are quick in their earnings presentations to mention that orderbooks are at a record low compared to a few years ago. While that is great because it reduces future supply growth and will provide some great long-term investment opportunities for investors, tanker companies’ order activity reflects either uncertainty or the expectation that supply and demand won’t tighten much in the near future.
This bodes negative for tanker companies such as Nordic American Tanker Ltd. (NAT), Ship Finance International Ltd. (SFL), and Tsakos Energy Navigation Ltd. (TNP), as well as the Guggenheim Shipping ETF (SEA) in the short to medium term.
© 2013 Market Realist, Inc.