Why falling capacity growth means a negative crude tanker outlook
Key crude tanker stocks updates, September 9–13 (Part 2 of 3)
The importance of capacity
Capacity, in a commoditized industry like shipping, is an important metric that directly impacts companies’ top line or revenue performance. When capacity grows faster than demand, competition will rise among individual shipping firms as they try to use idle ships and cover fixed costs. This will lower day rates, which will negatively affect bottom-line earnings, free cash flows, and share prices for tanker companies.
Capacity growth remains in downtrend
On September 13, year-over-year capacity growth for crude tankers, measured in deadweight tonnage, stood at 3.55%, which is a decline from 3.67% on September 6. Like the orderbook indicator, year-over-year growth has remained in a downtrend overall.
Why use year-over-year growth?
Analysts look at year-over-year growth because it adjusts for possible seasonality and short-term noise. Demand figures are often quoted on a year-over-year basis for the same reason, which also makes it easier to compare supply and demand. If supply growth outpaces demand growth, shipping rates aren’t going to rise. This can negatively impact shares.
Capacity growth: Coincident and lagging indicators
Unlike orderbooks, however, capacity growth peaked in January 2012. This makes capacity growth somewhat of a coincident or lagging indicator. When demand is increasing fast, pushing shipping rates up, managers try to take advantage by placing orders for new builds. Since a new ship won’t be delivered for quite some time, supply growth will lag orderbooks for a period.
Capacity growth tends to fall when shipping rates are depressed. In some cases, managers will scrap existing ships or delay new ship deliveries for a fee to alleviate downward pressure on shipping rates. At the same time, however, if capacity growth does fall to such a level that demand growth begins to outpace it, you can expect shipping rates to rise.
Weekly growth negative
The industry’s weakness also reflects in weekly crude tanker capacity growth, which stood at -0.02% based on the past eight-week moving average in order to smooth out short-term noise. While negative capacity growth may look positive, it isn’t. With the orderbook still around 10% of existing capacity, negative capacity growth just means managers are delaying new deliveries or scrapping existing ships because of depressed rates.
Effect on crude tanker stocks
Declining weekly capacity is another negative sign for companies such as Frontline Ltd. (FRO), Nordic American Tanker Ltd. (NAT), and Ship Finance International Ltd. (SFL). To a lesser extent, this will negatively impact the Guggenheim Shipping ETF (SEA) as well. Navios Maritime Acquisition Corp. (NNA) could also be negatively affected if industry fundamentals don’t return by 2017 and beyond.
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