The importance of capacity
In a highly commoditized industry, like the shipping industry, capacity 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.
An elevated supply growth
For the week ending June 28, tanker capacity measured in deadweight (the weight that a ship can safely carry across oceans) grew 4.40% year-over-year—higher than the previous week’s 4.31%—based on data provided by IHS Global Limited. Year-over-year capacity growth has fallen from the 2009 and 2011 highs of 11% and 8% (respectively), as an industry oversupply stopped managers from placing more orders for new ships. While this is a positive development, and year-over-year capacity growth is likely to fall much further due to a five-year record low construction activity (see Why shipping construction remains negative while ship orders for tankers rise), a 4.40% growth rate remains troublesome for the tanker industry because demand isn’t growing as fast as supply. According to RS-Platou, an international ship and offshore brokers and investment bank, the oil trade fell 2.6% during the first four months of this year compared to last year.
Since 2009, global oil trade growth only grew at a compounded annual rate of ~1.0%, as the United States (the largest importer of oil in the world) began to rely less on imported oil, even as demand from China continued to grow. Oil production has grown in the United States through the use of technologies called “hydraulic fracturing” and “horizontal drilling,” which made it possible to extract oil from areas where extraction was once considered impossible and uneconomical. The trend is expected to continue, as the latest data from Baker Hughes showed that drilling activity remains active in the United States (see Oil rig activity stays high, negative for oil shipping).
Negative outlook forecast
An elevated supply growth will continue to pressure tanker rates, which have been falling over the past few weeks (see Shipping rates for tankers continue to fall, negative for earnings). Companies such as Teekay Corp. (TK), Tsakos Energy Navigation Ltd. (TNP), Ship Finance International Ltd. (SFL), and Teekay Tankers Ltd. (TNK) will be negatively affected by this driver and will continue to face short- to medium-term headwinds. The Guggenheim Shipping ETF (SEA)—which invests in several tanker stocks, such as Nordic American Tankers Ltd. (NAT), Frontline Ltd. (FRO), and the companies mentioned earlier—will also suffer losses.
Investors should review other driver analysis to see what’s currently driving the tanker shipping industry. Some must-reads beyond those that have been mentioned in this article include Why China’s financial system remains negative for oil shipping (tankers), Why oil price is a key driver of tanker stocks, and Research shows China’s soaring housing prices actually support tanker firms.
More From Market Realist