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Why are important crude tanker indicators trading sideways?

Part 2
Why are important crude tanker indicators trading sideways? (Part 2 of 5)

Newbuild Very Large Crude Carrier prices are still under pressure

Consistent newbuild prices

Newbuild VLCCs (very large crude carriers) remained consistent or dipped marginally in July 2014, according to data from R.S. Platou—a leading international ship and offshore broking company. Newbuild prices for VLCCs, the largest common ship used to transport crude oil over long distances, decreased from $98 million in June 2014 to $97 million.

This was a 1.03% decrease. Prices for Suezmax veseels remained consistent to June 2013 levels of $65 million. But from December 2013, prices increased by 4.8%.

Newbuild Capesize vessel prices stood at $54 million. This price was consistent with June 2014 levels but higher than the $53 million from December 2013. Prices for Kamsarmax/Panamax and Ultramax vessels from January 2013 stood unchanged at $30 million and $28 million, respectively.

Crude Tanker Newbuild PriceEnlarge Graph

Outlook and impact

Newbuild prices affect the Guggenheim Shipping ETF (SEA) and tanker companies like Teekay Tankers Ltd. (TNK), Tsakos Energy Navigation Ltd. (TNP), Frontline Ltd. (FRO), and Nordic American Tanker Ltd. (NAT) because, alongside ship orders, they reflect company managers’ expectation of the industry’s future outlook and profitability.

If the outlook is expected to be favorable, managers will order more ships and push up shipyards’ utilization. As per RS Platou data, prices in the newbuilding market are still under pressure.

A strong relationship

The close relationship between the Baltic Dirty Tanker Index—a benchmark for crude shipping prices—and newbuild vessel prices might imply that shipping companies aren’t likely to invest heavily until they see strong signs that rates are expected to rise. Perhaps this is because these vessels are expensive and industry players are cautious not to overextend and depress returns from past investments.

Plus, if newbuild prices and prospective returns are currently high relative to expectations, managers will likely refrain from purchasing newbuilds as much.

An advantage

Unlike shipping rates in the spot market, newbuild prices are less volatile and aren’t subject to seasonality. While newbuild prices and shipping rates have diverged at times, they’ve more or less followed each other in the past.

Also, since it takes about two or three-plus years to build a tanker and each costs ~$60 million-plus, managers tend to focus on the longer-term prospects.

With newbuild prices suggesting operating pressure, managers will likely be cautious.

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