The importance of capacity growth
In a commoditized industry like shipping, capacity (supply) is an important metric that directly impacts companies’ top line or revenue performance. When capacity grows faster than demand, competition rises 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.
Year-over-year capacity growth declines
On October 11, year-over-year capacity growth for product tankers stood at 5.79%, according to IHS Global Limited—its lowest increase since February of this year.
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 reason, 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 capacity growth
Capacity growth is generally considered a lagging indicator because there’s a delay between the time managers see increased demand and the time they place new vessel orders and receive these new builds. However, it’s interesting that the characteristic didn’t hold true for the product tanker industry. Instead, it appears to show the characteristics of a leading or coincident indicator.
When shipping companies’ shares fell through October 2010 to October 2012, the share prices of companies such as Scorpio Tankers Ltd. (STNG) and Navios Maritime Acquisition Corp. (NNA) also fell. When capacity growth bottomed in October last year, the share prices of product tankers continued to slip for a few months, but they’ve rebounded nicely since the beginning of 2013.
Is this a coincidence? Maybe. But it may be worth watching, because there could be something different about the industry that results in this relationship. If the relationship holds, the recent decline in year-over-year growth may reflect weak or weakening demand for product tankers, especially since shipping rates also fell on a year-over-year basis recently.
Impact on the share prices of product tanker stocks
Although it’s probably too early to say this is long-term negative for product tankers, as the orderbook isn’t flashing any red flags, the short-term outlook for tanker companies such as Scorpio Tankers Ltd. (STNG), Navios Maritime Acquisition Corp. (NNA), Tsakos Energy Navigaion Ltd. (TNP), and Capital Product Partners LP (CPLP) may see some short-term weakness. The Guggenheim Shipping ETF (SEA) could also be negatively affected, but the shipping industry as a whole appears to be doing well, as global trade is picking up and supply growth for other industries in shipping is coming down.
© 2013 Market Realist, Inc.
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