Ship construction activity rises, caution ahead for investors

Market Realist

Tanker stocks weekly analysis August 5–9 (Part 3 of 10)

(Continued from Part 2)

Crude tanker construction activity

The second indicator that investors look at is construction activity. This provides additional data, on top of crude tankers on order, about when managers want to receive ship deliveries so that they can generate maximum profits. If managers expect supply and demand differences and shipping rate increases farther into the future, they’ll ask to receive the ship deliveries later. This will lower construction activity in the near term. So when construction activity isn’t rising, investors can expect shipping rates to remain at current or lower levels in the short to medium term, which is negative for shipping companies in a depressed market. On the other hand, lower construction levels will translate to lower capacity growth in the future.

August 9 update

The divergence we saw last week, August 5 to 9, in the number of ships on order and on “orderbook” (see Part 2) reflects an increase in construction activity. The number of crude tankers under construction rose from a record low of 35 last week to 36, while the number of ships on order fell from 149 to 146. This means ship construction firms have begun to work on more vessels than the number of ships delivered.

Positive and negative

On one side, this is positive because it shows the possibility of tightening supply and demand fundamentals, because managers try to estimate when rates will recover so that they don’t receive ships earlier than wanted. A leveling-off of construction activity, which managers seem to be aiming for, will show that the worst capacity increase we’ve seen over the past few years is history.

However, if the increase in construction activity leads to higher supply growth that eventually outpaces demand growth, it bodes negative for shipping rates. While rising construction activity isn’t necessarily negative, the weakness in orders (as we saw in Part 2) is a bit worrisome.

Caution ahead

So unless we see shipping rates rise out of normal over the next few months, the recent increase in construction activity could pressure supply in the medium term, and could negatively hit earnings and share prices for tanker firms such as Teekay Tankers Ltd. (TNK), Nordic American Tanker Ltd. (NAT), Ship Finance International Ltd. (SFL), Tsakos Energy Navigation Ltd. (TNP), and Scorpio Tankers Inc. (STNG) over the medium term. This will also affect the Guggenheim Shipping ETF (SEA), which invests in large tanker firms that tend to have healthier financials.

Continue to Part 4

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