Must-know: Shipping rates in downtrend, but the worst may be over

Market Realist

Key crude tanker stocks updates, September 20–27 (Part 8 of 10)

(Continued from Part 7)

 Shipping rates: A leading indicator

The single most important indicator that affects tanker companies’ performance is shipping rates. One widely followed index that tracks the price of shipping crude oil (unrefined oil) across the ocean for representative routes is the Baltic Dirty Tanker Index. Compiled daily by the Baltic Exchange for rates settled in the spot market on a time charter equivalent basis, it’s widely considered a leading indicator due to its timeliness. It often has a significant impact on the share prices of tanker stocks.

Baltic Dirty Tanker Index 2013-09-30

Rates are back down again following a short-term rise

On September 27, the Baltic Dirty Tanker Index stood at 586. Overall, the tanker index remains in a downtrend since late 2009, making new lows on every bounce and trough. The index was climbing higher in July, as demand rose in the United States and shipments to China increased. Fewer new ship deliveries and scrapping activity also helped. However, it was nonetheless a short-term bounce and rates fell in August.

A shift from downtrend appears to be looming

While rates remain in a downtrend, a shift in trend is something to look out for. The lower bound shown in the above chart represents the rates the industry is trying to support. As rates come down, some companies go bankrupt while others retire old ships that are typically more expensive. So, as time passes, the industry comprises a fleet portfolio that can do business at cheaper rates. The upper bound is the level that companies will try to take advantage of by receiving new ships. A breakout of the downtrend will mean there aren’t enough new ships to keep rates low anymore. If that happens, expect tanker stocks to rise in share prices—similar to how the Baltic Dry Index broke out of its downtrend a few months ago and dry bulk companies have been soaring since.

Baltic Dirty Tanker Index (YoY) 2013-09-30

Could the worst be over?

On a year-over-year basis, the index appears to be showing some positive development—rising from negative to positive territory in August. While it fell recently, to -17.39% on September 25, it bounced back to -16.98% on September 27. Compared to the months before June this year, the recent declines have been shallower. This reflects a smaller increase in excess supply growth.

If year-over-year change can hold up here, then the worst for the crude tanker business could be over. This would be long-term positive for crude stocks such as Frontline Ltd. (FRO), Nordic American Tanker Ltd. (NAT), Teekay Tankers Ltd. (TNK), and Ship Finance International (SFL). While the Guggenheim Shipping ETF (SEA) is also affected by the crude tanker industry’s fundamentals, the ETF also invests in product tankers and other shipping companies that are performing better.

Continue to Part 9

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