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Why supply growth has led product tanker shares in the past

Xun Yao Chen

Key product tanker stocks updates, September 9–13 (Part 2 of 3)

(Continued from Part 1)

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 rises 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.

Product Tanker Capacity Growth (Year-Over-Year) 2013-09-17

Why market participants watch year-over-year growth

On September 13, year-over-year capacity growth for product tankers stood at 7.20%. The growth rate has fallen from a recent high of 7.57% in August 23, but it still remains much higher than it was in September 2012. Capacity growth turned around last year, as managers were expecting demand to pick up more than 2.0%. While they might have been early, they were nonetheless not so far off. As you’ll see, rates for shipping product oil stopped falling in the beginning of the year.

How to 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, which can negatively impact shares.

Interpreting supply growth

Although falling supply growth could increase the probability that supply will tighten due to higher demand growth, capacity growth is often seen as a lagging or a coincident indicator. In a competitive market, as long as managers expect investment in new ships to deliver profitable returns, they’ll try to match demand with supply growth—sometimes lower supply growth, so that rates rise. So the increase we’ve seen since last year is somewhat positive, likely driven by optimism that non-OPEC (the Organization of Petroleum Exporting Countries, and the United States in particular) production will drive oil supply over the next few years along with some structural changes in worldwide refinery centers.

The growth trend remains positive for product tankers

As long as supply growth doesn’t outpace demand growth, we should continue to see it as a positive for companies such as Scorpio Tankers Ltd. (STNG), Navios Maritime Acquisition Corp. (NNA), Tsakos Energy Navigaion Ltd. (TNP), and Capital Product Partners LP (CPLP), as well as the Guggenheim Shipping ETF (SEA). It’s also interesting to note that supply growth had turned down in 2011, before the large sell-off in tanker stocks. Last year, we also saw supply growth turn up before the shares of these companies started to take off. Perhaps the managers have access to something we don’t know.

Continue to Part 3

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