Tanker industry background and trends, September 2–6 (Part 1 of 3)
The significance of the orderbook
The tanker orderbook represents managers’ assessment of the industry’s future fundamental outlook. It reflects the number or capacity of ships that have been ordered, as well as the number of ships under construction. When ship orderbook increases, it signals that future supply and demand dynamics are favorable and that companies can generate good returns. On the other hand, when ship orderbook falls, it reflects a negative picture for the tanker industry.
Divergence between product and crude tankers remains
On September 6, orderbook for product tankers and crude tankers stood at 12.47% and 9.58% of existing capacity measured in dwt (deadweight tonnage), respectively. Compared to last week, product tankers are up from 12.23%, a sign that the uptrend since the beginning of the year is intact. This reflects managers’ positive sentiments regarding the future profitability of tankers used to transport refined oil like gasoline, diesel, and kerosine.
The orderbook for crude tankers, on the other hand, remains in a downtrend. Although it has recovered some of the large drop from 9.98% on August 23 to 9.12% on August 30, we’ve yet to see signs of turnaround in orders. This means managers expect future shipping rates to remain low or continue to decline. These tankers are used to transport crude oil (unrefined oil) from primarily Africa and the Middle East to the rest of the world. Frontline Ltd. (FRO)’s board also pointed out that the industry remains troubled and that the company’s considering scrapping some ships to alleviate excess capacity in its second quarter earnings report.
Analysts often use a percentage to reflect the changes in the number of operating ships over time. An orderbook based on the number of ships has little meaning without context. If 12 ships were on orderbook, the interpretation could differ when existing capacity consists of 30 versus 1,000 ships. An orderbook also helps investors understand how much of existing capacity is currently in backlog and that if all of it were to be constructed, what percent of growth investors could expect.
As orderbook rises, so do share prices
The divergence we’ve seen between orders for product tankers and crude tankers reflects in share prices as well. Tsakos Energy Navigation Ltd. (TNP), Scorpio Tankers Ltd. (STNG), and Navios Maritime Acquisition Corp. (NNA), for example, have outperformed, as their fleets have significant exposure to product tankers. On the other hand, Frontline Ltd. (FRO), Nordic American Tankers Ltd. (NAT), and Teekay Tankers Ltd. (TNK) have underperformed.
The Guggenheim Shipping ETF (SEA) has climbed higher this year because it’s diversified into other international shipping companies like shuttle tankers, LNG (liquified natural gas) vessels, container ships, and some dry bulk ships that have performed well. While current orderbook continues to show a negative trend for crude tankers, investors should keep track of it because sooner or later, orders will resume, as analysts expect growth in Chinese crude oil imports to outpace declines in the United States over the next few years.
Browse this series on Market Realist:
- Part 2 - Why current capacity growth is negative for tanker companies
- Part 3 - Why crude tanker rates will likely stay low in later half of 2013