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.
August 9 update
For the week ending August 9, 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.
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 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.
Weekly growth rate
On a week-to-week basis, capacity fell by 0.19%. A larger number of ships being scrapped, relative to new ship deliveries, is the likely reason for this decline. Lower supply growth has been positive for shipping rates because it reduces competition and pricing pressure. But the key question here is will the weekly capacity growth rise back up towards 0.05%+? It looks like it will, with RS Platou showing 41% of total deliveries for 2013 still remaining in its latest July report (see below).
So unless we see companies aggressively scrapping new ships or companies delay receiving new ships, we’ll likely see higher week-over-week supply growth until the end of the year. This could negatively impact the share prices and earnings of 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. While the year-over-year growth rate could fall further, because it appears a large amount of new ships were being delivered during the second half of 2012 based on the week-to-week growth rate chart above, it could still remain higher compared to demand growth. This would also negatively affect the Guggenheim Shipping ETF (SEA), which has performed better because several holdings are listed in Japan and Europe.
Interested in SFL? Receive notifications on the latest research and sign up for a Market Realist account in one simple step: