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.
Scrappage and slippage of crude tankers
Between August 30 and September 6, tanker capacity measured in deadweight tonnage (the weight a ship can safely carry across the ocean) fell by 0.03% for crude tankers and 0.02% for product tankers, using the last eight weeks of data to smooth out short-term noises. The recent decline in growth rates appears to be driven by 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, but it reflects a depressed crude tanker market given that ship orders had slumped over the same period.
Why market participants watch year-over-year growth
On September 6, year-over-year capacity growth for crude tankers stood at 3.5%. Product tankers grew by a larger amount of 7.24%. Analysts look at year-over-year growth because it adjusts for possible seasonality and short-term noise. Demand figures are often quoted on a year-over-year basis for the same reasons, which also makes it easier to compare supply and demand. If supply growth outpaces demand growth, shipping rates aren’t going to rise, which can negatively impact shares.
Interpretation of the current growth rate
The decline in weekly capacity is a positive sign that incumbent firms are resorting to scrapping and slippage to alleviate excess capacity and support shipping rates for crude tankers. If rates rise further from here, however, capacity growth will likely rise. The low weekly growth for product tankers is most likely a short-term pause. Growth should pick up throughout the remainder of this year, because several companies, such as Navios Maritime Acquisition Corp. (NNA) and Scorpio Tankers Ltd. (STNG), have been placing large numbers of orders from last year.
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), NNA and STNG.1 We list demand fundamentals on our Marine Shipping page. We recently grouped demand dynamics in one series for crude tankers (see The dynamics of the global oil trade and demand for crude tankers). 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.
- STNG and NNA focus on product tankers, while FRO and NAT focus on crude tankers. ↩
- Part 1 - Why ship orders affect tanker companies’ share prices
- Part 2 - Why current capacity growth is negative for tanker companies
- Part 3 - Why crude tanker rates will likely stay low in later half of 2013
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