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Supply and demand
The shipping industry’s performance is basically driven by supply and demand. When demand rises, crude tankers benefit from higher shipping rates, and vice versa. When supply rises, shipping rates fall as more suppliers compete for the same amount of demand.
New ship additions
According to Frontline’s presentation, there were 622 VLCC (very large crude carrier) vessels at the start of 2013. Sixty-two VLCCs were scheduled to be delivered in 2013. Seven vessels were expected to be scrapped, and five weren’t expected to be delivered due to slippage. This meant VLCC supply was expected to increase at most by 8.0%.
Estimated new supply additions for Suezmax vessels didn’t look rosy either. At the beginning of 2013, Frontline had estimated that 37 vessels would be added to 468 existing fleets in 2013. While 55 ships were scheduled to be delivered, nine of them were not expected to be delivered, and nine more were be removed due to phase-outs and deletions. This meant Suezmax supply was expected to increase at about 8.0% too.
2013 didn’t look bright
While new ship deliveries for 2014 look much better, as only 19 VLCCs and five Suezmaxes were scheduled to be delivered, 2013′s new ship deliveries suggested another bad year for crude tankers such as Frontline Ltd. (FRO), Teekay Tankers Ltd. (TNK), and Nordic American Tanker Ltd. (NAT). As a result, performance of the Guggenheim Shipping ETF (SEA) will also be negatively affected.
Newbuild prices continued to slump
Shipping managers shared the same tone, as they refrained from placing a lot of new orders. Prices of newbuild vessels, an indicator that reflects the supply and demand of new ship orders, showed no strong signs of bottoming (see above). If managers saw a more upbeat outlook on future shipping rates, prices would have stabilized and turned up.
© 2013 Market Realist, Inc.