Why oil tankers' recent rally could be sustainable (Part 5 of 9)
For the most part, 2013 was indeed the gloom and doom year for the Baltic Dirty Tanker Index and tanker stocks like FRO, NAT, and TNP. Weakness in the Index also dragged the performance of the Guggenheim Shipping ETF (SEA) down.
At the start of November, the Index started to climb. For the first two weeks of November, rates appeared to have risen due to seasonality, because year-over-year growth remained negative.
Towards the end of November, though, the index broke out of its long-term downward trend line—something was different. By the end of December, the Index almost hit 1,000. During the first two weeks of January, it continued to soar higher, reaching 1,222 by January 16, 2014. Year-over-year growth also shot up, and it was last seen at ~93.3% on January 16, 2014—its highest growth in years. What has been driving this rise?
One big supporter of higher rates is supply growth. Since mid-2013, tanker industry’s supply had grown at close to zero percent. As depressed levels of shipping rates persisted, companies continued to scrap in order to raise cash to pay interest and debt, or to remove vessels as part of cost cutting efforts. If a vessel were expected to incur significant survey or maintenance costs in 2014, it gave managers one more reason to scrap.
Plus, fewer newbuild deliveries perhaps contributed more to zero supply growth in late 2013. While scrapping activity remained high, it wasn’t as high as the late months of summer 2013, based on IHS Global Limited’s data. Since week-to-week supply growth held up near zero, and sometimes even went negative, we may infer that new supply deliveries were very limited.
Supply growth is falling
Certainly, if rates remain elevated in 2014, there’s less incentive for companies to scrap as many vessels as they had in 2013. While this might sound negative, investors should take lower scrappage as a positive sign for the Guggenheim Shipping ETF (SEA) and tanker stocks. A much smaller number of new ship deliveries in 2014 would also support tanker stocks, especially if deliveries were delayed.
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