The orderbook’s importance
The orderbook represents managers’ assessment of the industry’s future fundamental outlook. It measures the number or capacity of ships that have been ordered, as well as the number of ships under construction. A rising orderbook often suggests that future supply and demand dynamics are favorable for new or existing ships to generate good returns. Conversely, a falling orderbook paints a negative picture.
A stabilizing orderbook?
On November 1, the crude tanker orderbook comprising every class of vessel stood at 9.48%, up from 9.34%. While we’ve been seeing a downward trend, we could be near an inflection point. Beneath the aggregate figure, orders for Aframax vessels have put up a strong performance, rising from below 5% prior to May to 11% as of late. Orderbook for Suezmax, which has been the worst performer this year, rose from 8.71% to 8.73% over the same period. VLCCs also saw a slight increase, rising from 6.39% to 6.40%.
Analysts often use a percentage of capacity to account for changes in supply over time. An orderbook based on the number of ships has little meaning without context: if 12 ships were on the orderbook, the interpretation could differ when existing capacity consisted of 30 versus 1,000 ships.
The boom and bust of orders
Crude tanker orderbooks have been falling since 2011, as managers saw the dark storm ahead. Orderbook figures hit as high as 47% mid-2008, when managers’ optimism about future oil trade growth was at its peak, largely driven by soaring oil prices and global economic growth throughout the early 2000s.
Unfortunately, that excitement evaporated with the eventual burst of the housing bubble (not just in the United States) and the beginning of an energy boom in the United States. As the global economy remained weak and cars became more fuel-efficient post–financial crisis, with alternative energy sources popping up here and there, oil consumption fell overall.
The divergence between the three classes of vessels reflects diminishing shipments from West Africa to the United States as the US imports less crude oil. These routes are traditionally employed by Suezmax vessels. Aframax has performed well, because non-OPEC countries are expected to contribute more to incremental oil supply over the next few years. These countries usually don’t have ports big enough to support the larger Suezmax and VLCC ships. More shipments are expected to be exported from West Africa and the Atlantic Basin to China in the future. These routes are longer than the ones that stretch from the Middle East to the Far East or West Africa to the United States. So they demand larger and more economical VLCCs. An increase in VLCC and Aframax demand will eventually support Suezmax rates too. So it’s important to also look at the overall orderbook.
While we’ve been negative about crude tanker stocks since their orderbook has remained in a downtrend over the past few years, the worst is likely over. A turnaround in orderbook would be positive for tanker stocks like Frontline Ltd. (FRO), Tsakos Energy Navigation Ltd. (TNP), Teekay Tankers Ltd. (TNK), and Nordic American Tanker Ltd. (NAT) over the long term. Of course, there are some companies with problematic financials, so we’re not saying all will be “safe” positions to hold. For investors who wish to diversify investments across multiple shipping sub-industries and safely benefit from improving fundamentals in crude tankers, the Guggenheim Shipping ETF (SEA) is an option.
© 2013 Market Realist, Inc.
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