Why car sales should face headwinds but remain positive for tankers in 2014

Market Realist

Why oil tankers' recent rally could be sustainable (Part 9 of 9)

(Continued from Part 8)

Car sales and tanker demand

As we noted in our guide to investing in crude oil tankers, transportation typically makes up more than 50% of a country’s oil use. So if automobile sales rise, demand for oil and tankers should rise. This is particularly important in countries like China, where the majority of people don’t have cars.

Robust 2013

China’s automobile sales were robust in 2013. Year-over-year sales growth recovered in late 2012 as inflation rebounded and the government injected stimulus. Despite all the talks on shadow banking, bad government loans, tightening credit, and soaring housing prices, people continued to purchase more cars.

Consumption growth

As more people drive cars, oil consumption goes up. While China is slowly moving away from investment- and infrastructure-led growth to consumption-led growth, this change isn’t necessarily bad for car sales. China may not see economic growth of high single digits or double digits, but cars contribute to consumption too—especially since their value depreciates substantially when driven from the store. As it becomes easier for people to take on more consumer debt and money is diverted away from infrastructure investments, car sales should continue to grow.

2014 headwinds

In 2014, vehicle sales in China could face headwinds as pollution concerns and traffic jams prompt cities to cap the number of new autos in order to meet the central government’s targets for reductions in air pollutants. China’s main car association currently forecasts growth of 10% in 2014, a number that’s about one-third short of the current growth rate. Lower sales growth is indeed negative. But even 10% growth will be positive for oil demand, oil imports, and tanker demand.

Brighter outlook

Fundamentals for crude tankers like Frontline Ltd. (FRO), Teekay Tankers Ltd. (TNK), Nordic American Tanker Ltd. (NAT), and Tsakos Energy Navigation Ltd. (TNP) look bright in 2014. The Guggenheim Shipping ETF (SEA) should benefit if the industry sees brighter days. We’ll update the indicators mentioned in this article as well as additional indicators investors should follow monthly.

For more information and an investment guide to crude oil tankers, see An overview of the crude tanker industry.

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